Retail landlords moving closer to interest cover breaches

The growing number of retailers requesting rent deferrals, rent holidays or with-holding rent will turn attention to the pain landlords are sharing in the coming weeks.

According to updates in the past few days, listed retail property landlords are collecting only roughly one-third of rent they would normally expect.

The latest is Hammerson which in Monday 30 March's Covid-19 update said it was cancelling the dividend and withdrawing all guidance on performance as the REIT reported rent collection for rent billed and due last week for Q2 at only 37% in the UK, its biggest market.

When rent already deferred, switched to monthly payment or waived althogether for some tenants is taken into account, the figure was 57% of UK rent due, Hammerson said.

The group said it was too early to say what the figures will be in Ireland while in France, where the REIT has switched to monthly rent arrangements, payment for April will be deferred according to government guidance. It was ‘not possible’ yet either to quantify the impact on Hammerson’s 36% share of income from 20 international premium outlets.

Green Street Advisors, which put out a note on the listed retail sector entitled ‘Uncharted Rent Territory’ 10 days ago, said the next level impact will be on property company interest coverage ratios and liquidity.

Rob Virdee, analyst at the real estate research firm, said that the issue now ‘is how close some landlords are to breaching covenants, not necessarily just loan-to-value covenants, but interest coverage ratios (ICRs).

‘What had been balance sheet issues in terms of leverage that was too high versus the value (for some property companies) is now more likely, in the short-term, to morph into operational issues where a company doesn’t bring in enough cashflow to cover payments. So is the next thing here interest deferrals on debt?’

Conserving cash by cutting or scrapping dividends has already been announced by European REITS with large retail portfolios including Unibail-Rodamco-Westfield, intu Properties, EuroCommercial and Shaftesbury.