(Bloomberg)—Eight months into the pandemic, clothing stores, restaurants, gyms and other businesses find themselves in a $52 billion hole.
That’s the total amount of retail rent that’s been missed since April, according to CoStar Group Inc. While some of the overhang has since been paid back, the remainder will be a drag on merchants as they try to rebuild and landlords demand their money. In some cases, the unpaid balances could drive them into bankruptcy.
“You’re going to have big bubbles that are going to be hitting next year or even in the fourth quarter,” said Andy Graiser, co-president of A&G Real Estate Partners, an advisory firm. “I’m not sure if they are going to be able to make those payments in addition to their existing rent.”
Overdue rent compounds the problems these companies have faced this year, including lost sales during shutdowns, consumers’ reluctance to return to stores and restaurants and the long-running migration of shoppers from brick-and-mortar locations to online venues.
Overdue Rent
Signet Jewelers Ltd., for one, deferred about $78 million of its rent payments, according to a September quarterly filing. In its most recent quarterly filing, Bed Bath & Beyond Inc. said it’s held back $50.6 million in rent payments and is in negotiations with landlords, while Francesca’s Holdings Corp. has said it owed $14.6 million in deferred rents and related costs as of Aug. 1. The women’s clothing chain has since said it plans to shutter about 140 locations by the end of January and that it’s in danger of financial collapse.
Red Robin Gourmet Burgers Inc., meanwhile, said that it’s received default notices from some landlords after it stopped making full payments in April. Chief Financial Officer Lynn Schweinfurth told investors on a Nov. 5 call that the restaurant chain had negotiated amendments for about half of its leases by the end of its third quarter and continues in talks for the rest.
Many of these unpaid bills won’t go away, but are instead being pushed into next year. Signet said it plans to pay back its overdue rent by the middle of next year, while Francesca’s plans to repay the amount over the course of next year, it said in a quarterly filing in September, and is asking landlords for more concessions.
Representatives for Bed Bath and Beyond, Francesca’s and Red Robin didn’t immediately respond to requests for comment. A representative for Signet didn’t have a comment beyond recent filings.
Landlord Stress
CoStar estimated missed retail rent, including payments from store chains, restaurants, gyms and bars, in each month using its own data, industry statistics and landlords’ public reporting. The figures don’t account for any back rent that may have been repaid in subsequent months. In all, retailers paid $146 billion in rent from April to November, CoStar said.
By Graiser’s tally, the group broadly owes an average of two to four months’ rent from earlier this year, but he expects making good on those debts will be hard because sales probably won’t return to what he considers normal levels next year.
TIAA Real Estate Account, run by the giant Teachers Insurance and Annuity Association of America, said in a Nov. 10 filing it received more than 1,000 requests from tenants for rent relief, primarily among retailers, with most asking for deferrals of less than six months.
Rent Percentages
So far, the amount of rent collected from retailers climbed from 54% at the end of April to 86% this month, according to CoStar. Malls have fared worse, with only 79% of rent due this month received. That makes the situation critical for landlords, too.
“It’s going to take a period of years, not months, to get through this,” said Michael Hirschfeld, vice chairman at JLL, a real-estate services firm.
Deferred rents and a raft of tenants’ failures helped drive CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust into bankruptcy earlier this month. CBL said this week that it has made agreements with most top tenants and is seeing significant improvement in collections as these tenants pay past due rents.
In high quality malls, collections are improving, though still down. Mall giant Simon Property Group Inc. collected 85% of rents in the third quarter, up from about 72% in the previous quarter. Brookfield Property Partners LP said it collected about 75% of rent due from mall tenants during that same period.
Landlords -- and lenders -- may be willing to make more accommodations out of court now that there is promising vaccine news, said Jay Indyke, a lawyer who chairs Cooley LLP’s restructuring practice. With a return to normal now in sight, lenders may find it worthwhile to keep supporting retailers instead of letting them liquidate.
“There are certainly some players that are willing to at least convert some of their debt to equity,” Indyke said.
In the meantime, retailers are giving up rights to landlords in exchange for big rent reductions, such as granting landlords the ability to terminate their leases with 90 days’ notice. At the same time, retailers who saw strong online sales in recent months may decide they don’t need all the stores or markets they once wanted. “The conversations that retailers are having about their go-forward fleet is very different than pre-virus,” Graiser said.
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