INSIDE RETAIL RESTRUCTURING
POST-COVID, SOME COMPANIES WILL BE A LOT SMALLER
since May, prominent Canadian retailers such as aldo Group inc., reitmans Canada ltd. and, most recently, Davidstea inc. and clothing chain Frank and oak have sought court protection while they work to restructure their businesses in conjunction with creditors, either under the Companies’ Creditors arrangement act or through a notice of intention to make a proposal under the Bankruptcy and insolvency act.
Even more have filed for protection in the united states, including home goods retailer Muji u.s.a ltd. and fashion chain Brooks Brothers earlier this week.
in some cases, restructuring means a significantly smaller business comes out the other side.
For example, reitmans next week is planning to shut down two of the five retail chains in its network, thyme Maternity and addition Elle, as part of its court-supervised plan.
the 94-year-old clothing company last month announced it planned to permanently shutter all 131 stores run by the two chains and liquidate their inventory starting on July 18.
But as a wave of struggling Canadian retail chains seek bankruptcy protection, the process of restructuring them so that they have at least a chance to survive the pandemic, never mind the incursion of online shopping giants amazon. com inc. and shopify inc., has become more a lot more complex.
So many retailers are in trouble that some have suggested there might be more pressure on landlords to make extraordinary concessions during negotiations, including a temporary switch to deals in which rent is based on a percentage of a tenant’s sales in order to help them back on their feet.
The pandemic has also complicated a common restructuring tactic used to provide a cash infusion to ailing retailers: the liquidation sale.
A good liquidation sale normally means a crowded store, said Bobby Kofman, managing director of KSV Advisory Inc., a Toronto-based firm that acts as a court officer in restructuring proceedings. He is currently advising several distressed retailers in Canada, as well as serving as the trustee in the bankruptcy of Lucky Brand dungarees Canada Inc., the Canadian operations of Lucky Brand Jeans.
Liquidation sales are liable to drag on much longer than normal to move the same amount of product given that stores have new customer limits, which will cost the company more money in rent and wages, and threaten to “materially erode recoveries,” Kofman and his colleague david Sieradzki said in an article posted to KSV’S website on June 10.
It’s also an awkward time for liquidations. retailers who were closed for months are now stuck with out-ofseason merchandise and offering heavy discounts, providing competition for distress sales.
But Kofman noted that since publishing the article he has heard some retailers who have found that foot traffic and sales levels at their liquidations have exceeded their expectations.
The main focus, for most formal restructurings under CCAA and the Bankruptcy and Insolvency Act, is typically downsizing the business, Kofman said. That can involve negotiating with landlords to exit leases early or rewrite agreements with more favourable terms.
“In the past, landlords were reluctant to give significant concessions,” he said, noting that landlords are often wary of setting new precedents. “Now, because of the wave of retail restructurings and the possibility that the landlord’s going to be sitting with a tremendous number of vacancies in their malls, there’s more willingness to provide concessions that I think they probably would not have considered in the past.”
The main concession landlords might now consider is percentage deals.
“That’s really the big one,” Kofman said.
Percentage deals have existed in retail real estate “for a long time,” said Fred Waks, the former president of riocan real Estate Investment Trust who now runs the retail real estate development firm Trinity development Group Inc., but such deals are likely to become even more common in future.
“The whole paradigm has changed,” he said. “In every recession … the fortress malls were always the predominant place for safety. right now, the fortress malls across North America are collecting anywhere between 20 and 30 per cent of the rents. That’s a recipe for long-term disaster.”
Major mall operators in Canada have reported steep declines in rent collections, as low as 20 per cent in April for most malls owned by Oxford Properties Group, the real estate investment arm of Ontario Municipal Employees retirement System (OMERS), which owns or coowns high-profile malls such as Toronto’s yorkdale Shopping Centre.
At that time, reuters reported that mall rent collection in the u.s. was as low at 15 per cent. Gap Inc. reported that it wasn’t paying rent in its North American stores.
“I don’t think it’s going to be a landlord’s market going forward,” said Karl Littler, senior vice-president of public affairs at the retail Council of Canada. “I’ve certainly heard retailers opine on the virtues of moving to more of a percentage-based rent system.”
Marty Weintraub, national retail lead at deloitte Canada, said percentage rents can be attractive for distressed retailers, but not necessarily for mall operators, which were struggling with declines in traffic even before the pandemic. The major risk for malls in negotiating individual percentage deals is setting an unsustainable precedent.
“There’s no doubt that COVID-19 has introduced some significant challenges and forced landlords and retailers to rethink how rent is charged and paid,” he said. “However, there’s a bigger opportunity to rethink the role of the mall going forward and how retailers and landlords can work together to bring the customer back.”
riocan chief executive and founder Ed Sonshine challenged the idea that percentage rents will start to become more popular.
“That doesn’t mean that we don’t do the odd one,” he said. “But I can tell you one thing: you can’t do too many or you can’t be in business ... We’ve been down that road early on with some certain retailers and it’s not a road that riocan is going down again.”
riocan, whose indoor shopping mall business makes up less than 10 per cent of its portfolio, in April estimated it would collect 66 per cent of that month’s rent that it would typically get. The REIT handed out roughly $15 million in rent deferrals for April.
Sonshine said rent collection will likely be “in the 80s” when the company reports quarterly results later this month.
“For the overall quarter, I think we’ll be reporting a very comfortable rent collection number,” he said, adding that retail tenants in open air shopping centres have fared better than those in indoor malls.
“The malls are a different story,” he said. “I think their second quarter rent collections will be very ugly ... It’s one thing for me to walk into a store from outside and spend 15 minutes in the store, as opposed to my going to a mall and spending two hours indoors. I think that will slowly change.”
Through the hardest months of the pandemic, riocan “didn’t want to be too brutal” in dealing with struggling tenants who couldn’t pay their rent, but stopped short of renegotiating long-term agreements, Sonshine said.
“We’re prepared to negotiate deferrals. We’ll even give the odd guy — if we think he’s really a good retailer — an abatement and say, ‘Okay, for April, May and June, just pay half your rent and we’ll forget about the other half.’ Very rare, but we’ve done that. But mostly it’s deferrals,” he said.
Sonshine said riocan has no interest in long-term renegotiations, adding that the company went into the pandemic with an occupancy rate of almost 97 per cent on 40 million square feet of space.
“rather than taking bad deals, I’m quite prepared to see our occupancy go down to 95 per cent,” he said.
i don’t think it’s going to be a landlord’s market going forward.