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Coronavirus: ASX shopping centre landlords to take hit as retailers shut up shop

Retailers have been at the forefront of coronavirus casualties so far, with many shutting up shop in the face of increasing government restrictions. Landlords, however, are likely to form part of a second wave of casualties as the economic impacts of coronavirus take hold.

While shopping centres are still open, many of their tenants are not. Cinemas, pubs, and clubs were the first to close. This was swiftly followed by arcades and play centres, beauty parlours, massage shops, and gyms. Now many retailers are choosing to shut up shop to head off the coronavirus threat, and ahead of tougher restrictions which may mandate their closure.

Retailers shutting up shop 

Retailer

Shops closing

Accent Group Limited (ASX: AX1)

All stores (over 500)

Adairs Limited (ASX: ADH)

All stores in Australia and New Zealand (~160)

Kathmandu Holdings Ltd (ASX: KMD)

All stores across Australia and New Zealand (~165)

Lovisa Holdings Ltd (ASX: LOV)

All stores in Australia, New Zealand, South Africa, France, Spain, Malaysia, the US and UK (around 400)

Michael Hill International Ltd (ASX: MHJ)

All stores in Australia, New Zealand, and Canada (more than 300)

Mosaic Brands (ASX: MOZ)

All stores (~1400)

Premier Investments Limited (ASX: PMV)

All stores (around 900)

Premier Investments’ major shareholder, billionaire retailer Solomon Lew, has said that the company will not pay any rent for the duration of the shutdown.

According to the Australian Financial Review (AFR), Lew is Australia’s biggest retail tenant. Premier Investments is behind stores including Smiggle, Peter Alexander, Just Jeans and Portmans. Lew also has interests in French Connection, Seed, and Nine West, which will likely shut their doors, too.

The decision by Lew to stop paying rent is likely to trigger a wave of similar action across the industry, according to the AFR.

Shopping centres to take a hit

This is bad news for landlords and shopping centre owners. Faced with rapidly falling foot traffic as customers move into self-isolation, they are now looking at an unprecedented number of closed stores throughout centres and tenants flatly refusing to pay rent.

Scentre Group (ASX: SCG) chief executive Peter Allen told the Sydney Morning Herald he was ‘surprised’ by Premier Investments’ shut down. “There is a legal obligation to pay rent even if the stores close and that legal obligation means we must engage in commercial discussions with our tenants,” Mr Allen said.

But shopping centres are still likely to take a hit, with Finance Minister Mathias Cormann telling the AFR that commercial and residential landlords will have to wear some of the “pain” by granting rent relief due to the economic downturn. Governments are currently working on a third economic relief package and are expected to push landlords to give relief to commercial tenants who lose income due to the coronavirus-invoked economic shutdown.

Shopping centres themselves have not been shuttered by governments in the effort to slow the coronavirus spread. They are considered ‘essential services’ as they ensure community access to essential goods.  “Our centres include supermarkets, grocery stores, food markets , pharmacies, medical centres and other retail stores that provide essential services to our communities,” a Scentre Group spokesperson said.

Wave of guidance withdrawals

But the shopping centre landlords are certainly feeling the effects of the wave of closures within their centres.

Scentre Group has suspended its outlook, while Shopping Centres Australasia Property Group Ltd (ASX: SCP) has withdrawn its earnings and distribution guidance, as has Vicinity Centres (ASX: VCX). Stockland Corporation Ltd (ASX: SGP) has also withdrawn its guidance, citing heightened uncertainty surrounding the coronavirus outbreak.

There is no doubt these shopping centre operators are now facing major challenges. Below we take a look at how each is approaching the situation.

Scentre Group

Scentre Group’s Westfield centres remain open for trade and the group has said it is working with its retail partners as they manage their business through the current volatile period. A Scentre Group spokesperson said, “we have a role to play in ensuring community access to essential goods and services in a safe, hygienic environment throughout this period as well as supporting the economy and jobs.”

The group says it maintains a strong financial position. At 31 December 2019, Scentre had available liquidity of $1.8 billion, interest cover of 3.6 times, and balance sheet gearing of 33%. It says it has sufficient liquidity to cover all debt maturities in 2020.

Vicinity

Vicinity not only withdrew guidance, it cancelled its share buy back. CEO and managing director Grant Kelly said:

Since announcing our interim results in mid February, we have seen a further deterioration in the retail trading and operating environment, with increasing uncertainty around the impacts of COVID-19. Given this, we have made the decision to withdraw FY20 earnings and distribution guidance provided at this time.

Vicinity emphasised that it had a solid balance sheet and is operating within its covenants. It has $1.3 billion in undrawn facilities.

Kelly added:

We also have flexibility to defer capital expenditure on major projects until COVID-19 uncertainties are resolved. However, as part of our prudent approach to management, and given volatile market conditions, the securities buy-back program has been suspended. 

Stockland

Stockland emphasised it had total available liquidity of $850 million at 29 February, comprising cash and committed undrawn bank debt facilities. It said it had a well-diversified debt book and a long dated maturity profile with significant headroom in financial covenants. Stockland says its balance sheet is strong, with gearing of 26.1% at 31 December 2019, and investment grade credit ratings

Shopping Centres Australasia

Shopping Centres Australasia says its centres remain resilient. All but one of its 85 shopping centres are anchored by either a Coles or Woolworths supermarket. As such, it says, its centres are benefitting from the elevated foot-traffic generated by these anchor tenants over recent weeks.

Anchor tenants also contribute 48% of gross rental income, with specialty tenants accounting for the other 52%. The group says that its specialty tenants are heavily weighted toward non-discretionary categories, with many trading strongly, including pharmacies, medical centres, liquor and fresh food retailers.

Shopping Centres Australasia says its balance sheet and debt position is robust. It remains within debt covenants and has $176 million in cash and undrawn facilities. Its next debt expiry is in April 2021 and it expects to have available funds to repay that note from existing undrawn facilities and positive cash flows over the next 13 months.

Foolish takeaway

Shopping centres may not be in the frontline of the coronavirus pandemic, but they are not immune from its impacts. Rental incomes are coming under pressure, and government intervention may force shopping centre landlords to take a hit.

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. The Motley Fool Australia has recommended Accent Group and Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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