SA’s largest landlords have spent more than a year reducing their exposure to national retailer Edcon in case the struggling group had to close shop despite a rescue package from the Public Investment Corporation (PIC) in 2019.
Edcon said on Wednesday it had entered voluntary business rescue because its financial position had soured since the government put SA’s economy into lockdown in late March.
The group said in a letter to its suppliers that it had lost R2bn in turnover so far. CEO Grant Pattison told suppliers in March that Edcon could not pay them because of a 45% reduction in cash flow, after shoppers stayed away in the wake of the Covid-19 pandemic.
In a bid to rescue the business, in 2019 the struggling retailer implemented a R2.7bn recapitalisation programme that included rent reductions and a R1.2bn investment from the PIC.
Edcon approached 30 of about 100 landlords, with 21 agreeing to reduce rent by 4`1% for two years, while the turnaround plan was implemented, in exchange for stakes in the group. Others injected cash in exchange for equity.
This resulted in landlords holding about 5% of Edcon’s equity.
Liberty Two Degrees (L2D), part-owner of Sandton City, Melrose Arch and Eastgate, said on Wednesday its investment in Edcon as part of the restructuring in March 2019 was carried at a fair value of R17.5m at the end of December.
In February 2019 L2D said it could replace Edcon as a tenant relatively easily if the plans to rescue the retail group failed.
“While we want Edcon to continue to trade in SA, employing South Africans and serving SA customers, our malls have survived things like this before. Most recently, Stuttafords closed down but our malls continued to meet or better our expectations,” it said.
L2D said Edcon occupies 33,674m² or 3.5% of its total portfolio gross leasable area.
Hyprop Investments, which owns Rosebank Mall, Hyde Park Corner, Clearwater Mall and Canal Walk among others, said it had reduced its exposure to Edcon by 16,627m² or 25% in the eight months between the end of June 2019 and the end of February 2020. Historically Hyprop had a large exposure to Edcon’s fashion unit, Edgars.
Since Pattison took over at Edcon in February 2018, Edcon has decreased its national footprint from about 1.5-million to 1-million square metres. It has also sold off underperforming businesses including news agent CNA.
Vukile Property Fund, which owns middle-income malls such as Randburg Square, Pinetown Pine Crest and Soweto Dobsonville Mall, said it too had been careful to keep its exposure to Edcon low. The exposure was at 3% of Vukile’s SA and Namibia portfolio by contractual rent. On a group basis, it was at about 1.5% given that half of Vukile’s assets by value were in Spain.
Vukile CEO Laurence Rapp said Edcon’s recovery was “trending in the right direction but Covid-19 has been a huge unexpected shock to SA business. We will have to see what they can do in the coming days.”
Vukile is exposed to mostly Edcon’s Jet stores, “which are smaller rental boxes. These boxes are easier to rent out. The Jet brand itself also trades well,” Rapp said.
Head of listed property funds at Stanlib, Keillen Ndlovu, said property companies had been prudent with their exposure to Edcon.
“Most real estate investment trusts have been conservative in how they account for Edcon’s income and some, including banks, have been excluding Edcon numbers in their forecasts as a precautionary measure,” he said.
Peter Clark, a portfolio manager at Ninety One, said the property sector had managed risks around Edcon.
“Edcon is still one of the largest retail occupiers, but the space has been shrinking steadily over the last 18 months. They already have a 41% rental discount from the restructure last year, so some of the pain has been absorbed. Let’s see how the business rescue process goes,” he said.
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