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Photo: Jithendra M/Mint
Photo: Jithendra M/Mint

Prolonged mall closure, rent waivers to impact operators: ICRA

  • The coronavirus induced lockdown has severely affected retail mall operations for almost three months
  • Mall operators, in some cases, are also offering a staggered reduction in discounts over the next two to three quarters

BENGALURU : Prolonged mall closure and rent waivers will test financial flexibility of mall operators, with operating income to decline by 45-60% in 2020-21, credit ratings agency ICRA said.

As malls have started opening gradually across cities, the terms between the mall operators and retailers are being revisited where broadly the former are agreeing to let go of the rents between 50% to 100% during the lockdown period.

The coronavirus induced lockdowns and preventive measures have severely affected retail mall operations for almost three months.

ICRA said over the last few weeks, though malls in some cities have resumed operations, properties in some of the cities are yet to resume.

While mall operators generate almost complete income from the lease rentals, retailers have also been severely impacted and revenues for most of them were reduced to zero during the closure period.

Rental expenses form a sizeable share of the 12-16% of the revenues for retailers, therefore, in line with expectations, the tenants have been negotiating with the mall operators for rent waivers.

Anand Kulkarni, Assistant Vice President and Associate Head – Corporate Ratings, ICRA, said, “...The contagion fear as well as the possible impact on disposable income of the consumers will lead to low footfalls in malls throughout the year. Further, people may fulfil their shopping requirements through e-commerce platforms or through local retailers in the near term, which may also impact the footfalls. In such a scenario most of the leveraged malls will have to take measures to fund the cash flow mismatches which are expected in the current year."

Some mall operators have announced blanket deals for tenants in their properties, which include a waiver of the minimum guarantee rentals for the lockdown period.

Other operators are still in one-to-one discussions with tenants and customised deals are being worked out for tenants.

Mall operators, in some cases, are also offering a staggered reduction in discounts over the next two to three quarters.

At the same time, the operators are also imposing terms like no near-term lease terminations and increased revenue share component for the residual period of 2020-21.

ICRA expects the cash flows of malls in the current financial year to get significantly impacted due to the discounts being offered to the tenants in the minimum guarantee rentals. The revenue share income is also likely to be depressed throughout the year. It is estimated that the impact on key financial metrics like net operating income and debt service coverage indicators will be acute due to the rent waivers. It will vary based on revenue share, cost optimisation and leverage levels.

According to ICRA, some of the vanilla or standalone retailers might not be able to resume operations even after the rental waivers due to weakening of their financial position.

“...We believe that lenders will play a critical role by supporting the mall operators and revisiting the repayment terms. Capitalisation of accrued interest, sanction of new debt facilities and extension in the repayment schedule will be some of the means through which the immediate impact on debt servicing can be mitigated. Hence, players with healthy financial flexibility will be able to mitigate the risks more effectively. Some players with diversified assets – apart from the retail segment on the balance sheet – will also be able to sail through the crisis comparatively better than the companies with standalone assets," Kulkarni said.

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