Retail Mall Reality unfolding

Scentre, the owner of the local Westfield mall empire, will not pay a dividend for the first half of 2020, in a move that could be replicated by other hard-hit mall owners.

The shopping centre giant cited uncertainty about the pandemic, its duration, the economic impact and the timing of operating cash flows as it made the move on Monday.

But it was buoyed by a busy weekend of trading in shopping centres in most parts of Australia.

Investors drove up its share price by 3.6 per cent and rival Vicinity Centres, part-owner of Melbourne’s Chadstone, lifted 4.5 per cent on expectations of an accelerated reopening.

Retailers starting to resume trade also got a boost. Myer added 8.6 per cent to 31.5c — marking a near 60 per cent surge in just the past two sessions — while womenswear retailer Mosaic Brands soared by 31.9 per cent to 93c. Super Retail lifted by 4 per cent to $6.92, while Kathmandu jumped by 15.4 per cent to $1.01.

Scentre chief executive Peter Allen said all Westfield centres remained open during the pandemic.

In its malls in major cities across Australia, 57 per cent of retailers, representing 70 per cent of gross lettable area, were now open, with more scheduled to reopen in coming weeks, he said.

The company still faces a bruising battle to recoup rents from tenants during periods they were closed.

It gave a sobering operational update, saying it would not pay the first-half distribution, which some analysts had forecast because of the tough conditions.

Scentre said retaining capital would further strengthen its financial position and ability to continue to deliver long-term returns but analysts have suggested it may need to sell off more than $3bn of its best assets in order to stave off a rescue equity raising.

Retail property owners had earlier pulled earnings and distribution guidance when the coronavirus crisis struck, but paying out income generated by properties has underpinned the Australian real estate investment trust (REIT) sector.

The move to not pay a distribution this half was the first by a major REIT, and follows some major banks.

It also reflects the dire state of shopping centres, with a recovery only just beginning and disputes between landlords and major chains about rental payment festering, as smaller tenants struggle to make payments.

There are also concerns that few landlords have made headway in collecting rents for April from tenants that were closed for the month.

Scentre reported that it had been hit hard in March, with specialty store sales down by a quarter on a comparable basis against the same time last year, with retail operators warning the following month could be worse.

The company has also deferred a Sydney development project but will continue other works, including the downsizing of a Myer store in the ACT, while reviewing other expansions. Scentre’s report reveals a stark divide within commercial property portfolios. Industrial and logistics property owners are on track, while office owners’ portfolios are also proving resilient, but mall owners are under the gun.

Vicinity also pulled its earnings and distribution guidance in March, citing uncertainty about the impact of COVID-19, but is yet to indicate whether it will pay a distribution.

Scentre’s customer visits bumped up in January and February but fell in March and April to a low of 39 per cent of the previous year’s level. However, the mall operator is hopeful of a recovery.

“As more retailers have reopened, we have seen an increase in customer visitation in recent weeks and most significantly over this last weekend there was double the level of visitations from five weekends ago,” Scentre said.

While the talks about rents are happening behind the scenes, the company said it would follow the national leasing code unveiled by the Morrison government. It has 2600 small to medium-size retailers, making up about 30 per cent of rental income.

Scentre said it was “in discussions” with tenants, on a case-by-case basis, to determine “appropriate ways we can assist with their potential cash flow issues”. But it added that contractual lease obligations remained in place.

Leasewise managing director Ange Kondos said major landlords were claiming that they were applying the code but tenants were holding out for full rent reductions.

Landlords were just kicking problems “down the road” into the next financial year, when they would support retailers they believed would make it, he said.

But he suggested if they took a hard line they could face significant vacancies, adding that the “balance of power” had shifted away from landlords. Retailer in-store sales were growing before the crisis but were hard hit in March as COVID-19 government restrictions came in, with total comparable specialty sales down by 25.9 per cent.

In an ominous sign for Myer and David Jones, department stores were off by 38.9 per cent in the month and cinemas were shut down by 46.1 per cent as they were closed down.

Suffering categories included fashion, down 38.9 per cent; dining, off 38.6 per cent as food courts closed; and footwear, down 41.2 per cent as consumers delayed purchases. By contrast, supermarkets jumped by 20.6 per cent.

“Retailers are starting to re-open stores nationally, but rental income could remain in limbo,” Morgan Stanley analysts Simon Chan and Lauren Berry said.

Scentre is not the only mall under pressure. The Morgan Stanley analysts said that Vicinity was in a difficult position.


Ben Wilmot – The Australian 12/5/2020