Last week, Urban Outfitters said publicly what many retailers are discussing in private: that it won't be paying rent. In the middle of a list of financial measures Urban said it was taking while its stores are closed, the apparel seller included the suspension of rent payments.
The retailer followed the Cheesecake Factory in doing so. The restaurant chain said in a regulatory filing that it would not be paying rent on its leases for the month of April. After that first shot, Urban Outfitters joined, followed by PVH (owner of Calvin Klein and Tommy Hilfiger) and bankrupt home goods seller Pier 1. More retailers, whether they announce it publicly or not, are almost certainly planning to skip rent as well.
Landlords, on the other hand, might not see rent as optional, even during a pandemic. In fact, one major retail landlord, Taubman, told tenants that it still expected rent payments, even with most of the operator's malls closed.
Credit Suisse analyst Michael Binetti describes it as an "uncoordinated effort" — a series of decisions made and emergency measures taken on the fly, without upfront approval. "And the landlords are like, 'Whoa! You didn't run that by us,'" Binetti said in an interview.
There is no playbook for what is happening in retail right now, with retailers closing among them tens of thousands of stores as businesses and governments try to slow the spread of COVID-19. Without money coming in from store sales, of chief importance is cash and financial flexibility.
Retailers have been drawing on their credit lines, but they are also taking a hard look at their expenses. For retailers, their biggest costs include rent, wages and vendor payments.
All of those things are likely under a microscope at major retailers. Some have already made painful cuts to staff and wages. Cuts to rent and vendor payments are coming as well. All of it means that the pain will be shared up and down the stakeholder chain.
'Looking carefully at leases'
The size of rent's burden in terms of cash and ranking in the cost structure depends on the specific retailer.
"For the true middle-of-the-mall retailers, it can be 10% to 11% of sales," Binetti said. For brands like Nike and others that also operate stores, it occupies a lower share of their expenses. For department stores, rent is equal to roughly 1.5% of sales, given that many companies in the sector own their own real estate and signed sweetheart deals years ago with mall developers who wanted them as anchors, Binetti said.
Some retailers may see no other choice but to skip rent. They just don't have the funds to pay it in full or are trying to protect their cash positions in light of the uncertainty around when they can re-open their stores and when customers will feel safe to shop at them again.
As Taubman indicated in a memo to tenants, it has fielded "numerous inquiries" about rent from those who occupy its malls. Lawyers and consultants who represent retailers and landlords also say they have been working on the topic with clients.
"Retail and retail landlords are looking carefully at their leases," Gregory Call, a partner with Crowell & Moring who has represented retailers, said in an interview.
Those leases, he noted, can run 100 pages long and might have clauses that can give each party, retailer and landlord, ammunition to argue that the retailer is or is not obligated to pay rent during a store or mall closure. And those arguments are further complicated by state laws created around the pandemic that might prevent eviction, and the specific circumstances of the closure.
One notable circumstance is the widespread closure of malls where retailers operate. Taubman, Simon Property Group, Washington Prime and others have closed malls across their portfolio in response to the pandemic. Other malls have been forced to close by state or local restrictions on non-essential businesses.
In cases where the mall is closed, retailers might look to language in many leases that obligates landlords to provide a functional space where retailers can properly operate, Call said. Retailers might also point to co-tenancy clauses, which can stipulate rent abatement or alternate rent payments when mall anchors like department stores or other key tenants close their stores.
Most leases also have force majeure provisions — language protecting parties from fulfilling contracts when unforeseen circumstances prevent them from doing so — which retailers and landlords will both likely try to interpret to their benefit, according to Call.
The 'showdown' over rent
In a client note Friday, Binetti described an "emerging showdown" between retailers and landlords as many retailers plan to suspend rent into May.
Retailers and landlords alike have plenty to lose in the situation. It follows that both parties "have strong incentive to work out a deal," Call said.
Along with the public announcements from retailers and landlords, there is already a lot of talking and negotiating going on behind the scenes.
"It's to the landlords' benefit to work with merchants to keep those spaces filled and stabilized until that restart," Kenneth Lamy, founder and CEO of consulting firm The Lamy Group, said in an interview. Lamy's firm works with landlords to help assess their retail tenants' financial health. Landlords, he said, need disclosure from retailers so that they can make decisions about which retailers need the most relief.
"When you look at it from the landlord perspective, there's clients-slash-tenants that actually need some sort of relief," Craig Solomon Ganz, a partner with law firm Ballard Spahr, said in an interview. "And then there's other clients-slash-tenants that are using this as an opportunistic moment."
He added, "For example, if you are a drugstore right now, or you are a supermarket right now, this is probably not the time to pick up the phone and and try to take an opportunistic moment to drill down on your landlord for rent concessions."
Much as the law might play a role, rent might be made as a business decision for retailers and landlords alike. Landlords might have contracts to hold up, but they need tenants to fill their malls, and mass evictions or financial failures among tenants isn't in their interest any more than a mass shortfall of rental income.
It's worth noting that Taubman, along with reminding tenants of their lease obligations, also said in a press statement that its memo to tenants "does not replace our willingness to talk to each tenant about their respective challenges and help them chart an appropriate course for the future."
"I have seen it mostly be viewed by my clients as a long-term partnership view and not adversarial," Ganz said. "It makes perfect sense for landlord and tenant to come together. No one is going to have a win-win in this situation."
Landlords have their own bills to pay, very often including mortgages on the properties they own, as well as costs associated with maintaining their properties (something Taubman pointed out in its memo). Call notes that "there is a third party in that discussion, and that's the lenders to the retail landlords."
Brian Davidoff, chair of Greenberg Glusker's bankruptcy practice, says he has landlord clients who are considering not paying their mortgages during this period.
Larger landlords typically have good cash positions, and more ability to pay mortgages, according to Ganz. And they are incentivized to work with their retail tenants to maintain their long-term relationships.
That cuts both ways. Ganz thinks unapproved decisions to skip rent by retailers could create some "ill will" among their landlords, bringing with it unintended consequences. "It goes back to having open dialog and communications versus unilateral decisions" like those of Cheesecake Factory. Announcements of that sort by retailers "could be a jumping off point" to longer talks with landlords, Ganz said. "But it's a heck of a way to start a negotiation."
Landlords aren't the only ones who will be sharing the pain with retailers facing closures. Some retailers, including J.C. Penney, among others, have indicated they plan to extend vendor payments to preserve liquidity.
"We have compiled a growing list of 30+ retailers who have sent communications to suppliers dictating new payment terms," Dennis Cantalupo, CEO of Pulse Ratings, told Retail Dive in an email.
He added, "What is surprising is that some very healthy retailers have extended terms, which we feel places an unfair burden on their supplier partners who are also desperately trying to manage cash flow during this crisis."
Retailers also have minimum inventory purchases that they've committed to with their suppliers. Those commitments are accounted for in securities filings and are among "the hardest things for you to get out of," Credit Suisse's Binetti said.
"If these stores are closed longer than [retailers] think, and they have to come up with another big number, another big cash amount, the only thing that they have left is the inventory that they've committed to," he added. With retailers already tapping their credit, laying off or furloughing employees, skipping rent and taking other measures to shore up cash, retailers could start backing out of those inventory commitments.
"This pressure on the retailers is going to get pushed up to the vendors, no doubt about it — in big size. In big size," Binetti said.