Emira takes a long-term view of relief to tenants amid Covid-19
Owing to the impact of Covid-19, JSE-listed real estate investment trust (Reit) Emira Property Fund has taken a long-term view when assessing the type of level of rent relief provided to its tenants.
With tenant sustainability having been at the forefront of the company’s considerations, to ensure that as many tenants as possible survive this period, Emira says it has spent “a considerable amount of time” engaging with tenants, both directly and through collective industry initiatives, to understand the impact of the Covid-19 related lockdown on their businesses.
Constraints on consumer spending will have a direct effect on retailers’ trading numbers, which Emira says could potentially push national and regional retailers to reduce the number of shops and/or trading areas.
Consumers’ shopping patterns, including the frequency of visits to shopping centres, may take some time to return to pre-Covid-19 levels, and businesses are also now improving online and delivery technology to complement and improve their sales.
The demand for commercial office space and tenants’ requirements may also change, Emira notes, not only owing to the risk of business failures but also with more employees now working from home. That said, physical distancing could potentially increase the space requirements of office tenants, the company adds.
It is for this reason, and the difficult trading environment, that Emira has “shared the burden” by aiding most of its tenants, with a particular focus on those tenants who were hardest hit by the lockdown, especially those who were unable to trade and small, medium-sized or microenterprises (SMMEs).
Concessions were made in the form of gross rental deferrals and/or the provision of rental remissions to tenants, depending on their specific circumstances, for the months of April, May and June. Certain negotiations are still underway, Emira says.
According to the company, the rent deferrals provided have payment terms ranging from three to nine months, with the majority of deferred rentals being payable in nine equal instalments, starting in October.
From a commercial perspective, Emira notes that “it is more efficient” for Emira to invoice the deferred position of rentals only when payable, hence the applicable deferred rental portions being in April, May and June.
The extent of rental concessions granted to 1 152 SMME tenants across Emira’s direct portfolio totals about R74.9-million.
Collection rates are, however, expected to increase as the lockdown eases and tenants’ trading improves.
Further to this, Emira also updated shareholders regarding the impact of Covid-19 on its South African and US operations, prior to its year-end on June 30, when it will enter a closed period.
A similar approach to the above mentioned was adopted with the Enyuka portfolio in respect of rent relief granted to tenants.
In the US, Emira’s portfolio of ten co-owned power centres have fared moderately in the wake of the Covid-19 pandemic. The properties, located across seven states, have each applied their own level of restrictions on businesses, travel and stay-at-home orders.
While most states applied restrictions from as early as March, with the earliest easing of restrictions starting in May, a few restrictions currently still remain and relate mostly to capacity restrictions in restaurants, bars and places of entertainment.
Nonetheless, Emira says the restrictions in the US were “far less stringent” than those seen in South Africa, with most businesses being allowed to trade if they adhered to certain regulations.
According to Emira, this saw many of the portfolio’s tenants use e-commerce to supplement normal trade, coupled with delivery or “kerb-side” pick-up of products, and most restaurants were able to provide take-out services.
Smaller tenants, meanwhile, were able to access significant federal funding through the Coronavirus Aid, Relief and Economic Security Act, which was passed by the US Congress to provide economic relief from Covid-19.
Despite this, overall retail sales were estimated by the US Census Bureau to have dropped some 14.7% from March to April, and then improved by about 17.7% from April to May.
Considering the open-air nature of Emira’s centres, the company says, “the fact they are shadow anchored by major grocery retailers and the high credit quality and value offering focus of the medium-sized to larger tenants, trading at these properties has been far less impacted than traditional enclosed malls have been.
Owing to the credit quality of Emira’s US tenants, relief has generally taken the form of deferments of a varying portion of rentals for April, May and June, typically with expense recoveries not being deferred.
In the uncommon instances of rental abatements being given, Emira explains that the landlord generally received equal economic benefit through various means, including lease extensions and/or reduction in future tenant installation commitments.
Although May and June trading has increased as restrictions have eased and illustrated the benefit of the value offering of many of the US portfolio’s tenants, the pandemic has put significant pressure on many retailers that were in difficult positions prior to the pandemic.
Emira is confident that the US portfolio will continue to attract and retain retailers that are able to weather the crisis and trade successfully into the foreseeable future.
Further, the company completed the disposal of the balance of its Growthpoint Properties Australia (GOZ) shares in June, the proceeds of which have been used to reduce debt and the corresponding Australian dollar cross currency interest rate swaps were settled in full.
Regarding capital management and liquidity, Emira entered the Covid-19 lockdown with a strong balance sheet, given its lower debt levels and prudent approach to valuing assets.
As at Tuesday, June 23, the company had a total of about R680-million available in cash and undrawn debt facilities.
Emira also has a diversified funding base, part of which is a new two-year R200-million debt facility that was put in place with a local bank on May 20.
On June 12, Emira repaid the maturing R200-million three-year bond, EPF012, using available debt and cash.
Emira has R509-million of debt maturing in the six months to December 31 and a further R1.2-billion that matures in the six months to end June 30, 2021, all of which are anticipated to be refinanced.
The company is also in advanced stages of finalising two new facilities to further bolster its liquidity and has R2.6-billion of unencumbered, directly held properties available for security.
While the rent relief given to tenants since the start of the Covid-19 lockdown will result in a reduction of Emira’s profit for the 2020 financial year, and property valuations are likely to be negatively impacted going forward, all bank covenants are expected to be met for this reporting period and thereafter, the company says.
Further, owing to rental concessions, including remissions and deferments, provided to its tenants for the months of April, May and June 2020 in response to the Covid-19 lockdown, Emira expects its distributable earnings for the current financial year to decrease by at least 15% (R118-million) when compared with the distributable earnings for the financial year ended June 30, 2019.
Given the uncertainty regarding the future effects of Covid-19 on global economies, and the impact thereof on Emira’s future financial performance and position, the board will revisit the company’s distribution policy, which is currently to pay out 100% of distributable earnings.
This, however, will only be formally considered at the board meeting scheduled for the end of August and will consider Emira’s financial position and liquidity forecast at that date.
Emira is scheduled to release its results on August 31.