What a Rent Moratorium would mean
All,
Clearly that would be a significant shift of wealth from landlords to retailers and of market/government focus vice versa. Perhaps it is time to position for that in the very short term (today).
Boris Johnsn’s order to close shops has come just in time for retailers. British Q2 commercial rent payment day is tomorrow 25th of March. The pendulum in negotiations with landlords has swung decidedly in favour of retailers as the government announced that defaulting on leases does not constitute forfeiture. The trouble is that “no forfeiture” is not quite enough for retailers.
No rent moratorium has thus far been imposed and from a government’s perspective that looks undesirable. At this point the retail sector has been hit hard, but while that puts obvious pressure on landlords, their sector has not yet been a bail-out candidate. Adding another deeply troubled sector and creating confusion and imbalances between them would make it hard for the government to ensure that everyone is treated fairly, resulting in taking on greater debt than necessary and possibly creating imbalances that will result on the one hand in more insolvencies than necessary and on the other in making some people very rich, who were not the intended recipient of funds.
However, time is of the essence. Large tenants have announced they won’t pay tomorrow’s bill and it now very much looks like rent will be forfeited altogether, or at least to a large extent. So a moratorium might just only set standards straight and allow for a more coordinated government approach in the next days. Also, landlords are more concentrated and are generally where much of the debt sits. It may even serve as model for other countries. At least the market would be contemplating that possibility.
Thus there may be an opportunity to briefly short the Real Estate sector (if not already). Intu, British Land, Heathrow, WeWork, The Office Group, Canary Wharf, Grosvenor etc. would all suffer even further and in some cases become bail-out candidates.
Meanwhile, retailers would be thrown a still somewhat unquantifiable lifeline. Shops would likely benefit more than most restaurants as their rent expense as a % of sales tends to be relatively higher - in healthy times. For the record (rather than a fantastic long opportunity right now) the impact on retailers would be approx. a reduction of 0.25x - 0.3x turns of LTM EBITDA leverage:
Matalan: Sales £1.1bn, Rent £100m, LTM EBITDA £90m, One Quarter Rent Holiday Benefit = -0.28x leverage.
New Look: Sales £1.1bn, Rent £110m, LTM EBITDA possibly £80m, One Quarter Rent Holiday Benefit = -0.34x leverage.
Pizza Express: Sales £550m, Rent £70m, LTM EBITDA possibly £73m, One Quarter Rent Holiday Benefit = -0.25x leverage.
Iceland: Not sure this would apply to shops that are exempt from the lock-down.
Wolfgang