Taking over tenants floated as option for major mall owners
Analysts suggest landlords could follow U.S. playbook to preserve holdings' value
As Canadian retailers, from small shops to major mall anchors, struggle to survive the pandemic, there are suggestions the country's major shopping-centre landlords could take a page out of the playbook in the United States, where rent collectors have turned into owners by snapping up the assets or operations of those struggling to pay.
In Canada, some of the largest shopping centre landlords are housed within well-capitalized pension funds that could afford to buy key tenants to preserve the value of their holdings, said Bradley Snyder, executive managing director of Tiger Capital Group, a Boston-based firm that provides asset valuation, advisory, and disposition services to retail clients.
“They have material tenants who they cannot lose,” he said. “This isn't hypothetical, it's happening in real time in the States ... So it's going to make sense in certain circumstances that these landlords step in and either back or buy some of these material retailers.”
This week, Indianapolis-based Simon Property Group Inc. and Toronto-based Brookfield Asset Management Inc. closed a Us$1.75-billion transaction to acquire Jcpenney's operating and retail assets after the retailer entered Chapter 11 bankruptcy proceedings.
For Brookfield, the investment follows through on a $5-billion “retail revitalization” program launched in the early days of the COVID-19 pandemic to provide capital and assist with the recapitalization of retail businesses through non-control investments. Funded by the alternative asset manager and its institutional partners, the program targets retail businesses with at least $250 million in pre-pandemic revenues that have been operating for at least two years.
Brian Kingston, chief executive of real estate at Brookfield, said in a statement Monday that the Jcpenney transaction is “exactly the type of investment” the retail revitalization program was designed to make, and one that creates “a successful blueprint” for using pooled expertise and industry relationships to transform the retailer.
A spokesperson for Brookfield declined to comment on whether there are plans afoot to purchase struggling retailers in Canada.
However, one doesn't have to look far to see signs of serious trouble on the landscape. Iconic Canadian retailer Hudson's Bay Co., which was recently privatized, is in multiple battles with landlords across the country amid reports its department stores have not been paying rent since the pandemic was declared in March, shuttering shops and malls. “We believe that landlords and tenants should work to amicably and logically share the losses incurred during the ongoing pandemic,” an HBC spokesperson told the Post.
For other Canadian retailers, trying to contend with reduced sales — due to government-mandated shutdowns while facing increasing costs to deliver goods as they compete with online shopping alternatives such as Amazon — has taken a heavier toll: Like Jcpenney south of the border, several have entered proceedings to stave off creditors and bankruptcy.
This list includes household names such as Pier 1 Imports Inc. and Davids Tea Inc., Reitmans Ltd., Aldo, Le Chateau Inc., Mendocino Clothing Company Ltd., Groupe Dynamite Inc. and Moores the Suit People Inc.
Buying a struggling retailer is not the only choice a landlord has. Shopping malls have large footprints and, in some cases, it might be preferable to buy tenants out of their leases and convert the property into sought-after “mixed use” development with condominiums, offices, entertainment, shopping and dining.
“It is opportunity specific,” said Snyder, adding that some retail acquisitions in the U.S. have been pursued to keep the anchor tenant in a mall and preserve so-called co-tenancy provisions. Once an anchor tenant leaves, these co-tenancy clauses can trigger reduced rents for other mall tenants or allow them to get out of their lease commitments relatively unscathed.
Some landlords, spooked by the complications of running a retail operation, have sought strategic partners, Snyder said, pointing to another form of deal that has gained traction in the U.S.
Simon Property Group, which has bid on struggling retailers including Brooks Brother, Forever21 and Lucky Brands, partnered with Authentic Brands Group to acquire apparel and accessories brand Aéropostale, for example.
Still, some industry watchers are skeptical Canadian landlords will follow the path of their U.S. counterparts, suggesting that the risk profile of a retailer doesn't fit the investment appetite of pension funds in which they are housed.
“I would be surprised if the big pension funds were going down this path,” said Charlene Schafer, a partner specializing in commercial real estate and private equity at law firm Torys LLP in Toronto.
She noted that such investments would have to meet the specific criteria of the risk officers or committees at some of Canada's largest and most sophisticated pension funds.
Cadillac Fairview, which owns 19 shopping malls across the country including the Toronto Eaton Centre, is part of the Ontario Teachers' Pension Plan. OMERS, which oversees the pension of municipal workers in Ontario, owns Oxford Properties, another large owner of shopping centres. And Ivanhoe Cambridge, owner of 26 shopping malls across Canada, is housed within the Caisse de dépôt et placement du Québec.
Officials at Oxford Properties and Ivanhoe Cambridge said investing in or purchasing retail tenants is not part of their current investment strategy. “Over the course of the last nine months, we have deployed a series of mitigating measures, on a case-by-case basis, including rent deferrals as well as participating in the CECRA (rent) program to help our retailers across our Canadian retail portfolio as well as support the economy of country,” said Ivanhoe Cambridge spokesperson Katherine Roux Groleau.