Retail Lease Defaults Have Ripple Effect

As it does during the first week of every month of the pandemic, attention turns to retail leases. This week found that one of the crisis’ most troubled retailers — Nordstrom — will only pay half of its rent for the balance of 2020. With one of the country’s largest real estate firms reporting 65 percent collections it’s clear that the retail reset is having a ripple effect.

A letter from President of Stores Jamie Nordstrom to landlords on Friday showed that the company would use same-store comparisons as the basis for its decision to make its lease payments. The report suggested that Nordstrom would pay “up to a full reconciliation should 2020 sales reach 90 percent of sales made in that location in 2019.”  The retailer reportedly said it would “continue to maintain insurance coverage, pay utilities on which we are the account holder and maintain your building(s) as required by the lease.”

Retail Properties of America, Inc. (RPAI), a real estate investment trust that owns open-air shopping centers, reported the company had collected 65.3 percent of Q2 2020 rent as of the end of June. The company also stated that rent collection for June arrived at 64.7 percent as of the end of June, according to an announcement.

RPAI said it had collected 67.4 percent of April rent as of the end of June, compared to 60.3 percent of April rent as of May 28. It has also collected 63.7 percent of May rent as of the end of June, compared to 52.4 percent of May rent as of May 28.

All of which leaves landlords and real estate owners in a precarious spot. It’s not known how many retailers have tried to strike the Nordstrom deal of tying rent to store performance. But the situation extends well beyond Nordstrom. According to a report in real estate trade publication The Real Deal, some landlords have about one month of forgiveness left. Others, like Simon Property Group, the nation’s biggest mall owner, don’t even have that. Simon recently filed a $66 million lawsuit against Gap for failing to pay rent at its stores.

Says The Real Deal: “A report released Thursday by Woodland Hills-based real estate analytics firm Datex Property Solutions showed dozens of chain retailers did not pay rent in May. The report, compiled from the company’s roster of national landlord clients, points to the Gap and its subsidiary Old Navy, along with H&M, Tilly’s, Bed Bath & Beyond, Pier One, and Bath & Body Works as each paying less than 10 percent of their May rent.”

Sandy Sigal, CEO of Woodland Hills-based mall landlord Newmark Merrill, said June collections are about even from April and May at his 80 shopping centers. “My sense is that it will take until the end of June for businesses to get into the new rhythm and deal with the operational costs and occupancy restrictions,” he said. “I think July will be the first good test of the ability of tenants to pay fuller rent.”

In April, Gap Inc. suspended rent at its 2,700 stores. During an earnings call in early June, Gap Chief Financial Officer Katrina O’Connell said the company was “in active and ongoing negotiations with our landlords to work through this crisis together.” Those discussions included efforts to “abate a portion or all of the suspended rent,” she added.

Simon has been collecting with one hand and spending with the other. It is now rumored to be bidding for another troubled tenant, bankrupt clothing retailer Lucky Brand Dungarees. It, along with Authentic Brands Group owns SPARC Group. SPARC controls several clothing brands including Nautica and Aeropostale. SPARC made what is called a stalking horse bid for “substantially all” of Lucky Brand’s assets following its bankruptcy declaration on July 3. According to Seeking Alpha, a stalking horse bid is one in which a potential buyer makes an initial offer for bankruptcy assets. SPARC’s offer is $140 million in cash, along with a credit bid of $51.5 million.  A subsidiary of Authentic Brands (Forever 21, Aeropostale) has also made a bid for Lucky Brand, this one totaling $90 million.

The tide of bankruptcies is most likely far from over. New York City-based legal firm Crowell and Moring advises retailers in that situation to come prepared.

“The prepared retail tenant will be armed with hard data to back up its request to the bankruptcy court that the landlord be required to cure its breaches and pay all monetary losses before it is allowed to assume the lease,” it says. “In the face of such a detailed objection by the tenant, the landlord will be compelled to come to the table. In contrast, if a tenant fails to prepare and instead opposes assumption by relying on general allegations of a landlord’s noncompliance, then it is more likely the bankruptcy court may permit assumption based on nothing more than the landlord’s general assurances to cure. Such assurances are of course worth little.”