Fears over Pick n Pay ripple through JSE Reits after Hyprop warning

It took just 13 words about Pick n Pay at the end of Hyprop’s trading statement for the first six months of the year and the wholly unexpected move by the retail-focused real estate investment trust (Reit) to withhold an interim dividend to wake the market up to just how big the risks around Pick n Pay potentially are.

It referred obliquely to “Pick n Pay’s (which is a significant tenant of the Group) recent announcements”, which, along with the devaluation of the naira (it owns Ikeja City Mall in Nigeria) and “uncertainty” ahead of May’s election, as the reasons for electing not to pay a dividend to shareholders.

The news sent Reits lower on the day, with Hyprop dropping almost 7 percent before it recovered to close down 4 percent. Other Reits with a large retail focus ended down between 1 percent and 3 percent.

Retailer to play hardball?

This is not necessarily about Pick n Pay practically collapsing, as was the case with Edcon — there is likely far too much institutional (and Ackerman family) support for that to happen. Rather, the supermarket group may well play hardball with landlords and demand rental concessions.

Already, murmurs in the market are that as many as 30 or 40 underperforming corporate stores will be shut this year.

This means a ton of vacant space.

Rivals may snap up some of this (depending on whether or not they already have a presence in the centre or area), but renting out vacated big box units is going to take time.

PnP CEO Sean Summers is a shrewd, formidable negotiator.

You can bet the group will be able to extract rent reductions or an easing of terms from landlords for the (likely long) list of marginal stores.

On June 30, last year, Hyprop disclosed that Pick n Pay (all store formats including liquor and PnP Clothing) comprised 7,5 percent of Hyprop’s gross lettable area (GLA) in South Africa.

With a total GLA of 658 698m², that equates to practically 50 000m² at its malls.

Pick n Pay is an anchor supermarket tenant at every single one of its malls in South Africa: Canal Walk, Clearwater, The Glen, Woodlands Boulevard, CapeGate, Somerset Mall, Rosebank Mall and Hyde Park Corner. The recently acquired Table Bay Mall, which will transfer this month, also has Pick n Pay as an anchor tenant.

The various listed Reits are inconsistent in disclosing their largest tenants (and, therefore, exposure). Some publish their largest tenants by GLA and others by “contractual rent” or gross monthly rent (GMR).

Usefully, Redefine discloses both. Pick n Pay’s stores comprise 6,9 percent of GLA across Redefine’s retail portfolio — around 80 000m². On a rental basis, this is ‘just’ 4,9 percent — around 70 percent of the proportion of space occupied.

Pick n Pay pays Redefine rent of over R10 million per month — R123 million a year.

At Growthpoint, the group is the fourth largest tenant by GLA (after TFG, Mr Price and Pepkor). Growthpoint is a much bigger landlord, which means PnP occupies 110 000m² across its portfolio. This is nearly 10 percent of its total space (1,15 million m², excluding vacancies).

Vukile doesn’t say how much space Pick n Pay occupies, but it does state that the group accounts for 7,2 percent of the Reit’s contractual rent.

Its middle market QualiSave brand accounts for 3,5 percent, and the Pick n Pay brand (aimed at more affluent consumers) is 2,4 percent. Boxer and the group’s other formats would account for the rest. Based on the proportion of rental income, Pick n Pay likely occupies close to 10 percent of Vukile’s GLA in South Africa.

At Resilient, Pick n Pay is the sixth largest tenant “by value” after TFG, Mr Price Group, Pepkor, Shoprite Checkers and Massmart. It accounts for approximately 4,5 percent of Resilient’s contractual retail revenue, which would be about 6 percent to 7 percent of space (GLA) at the Reit’s mostly regional retail centres across the country.

Jitters ironic

The jitters caused by Pick n Pay’s turnaround (and recapitalisation) are somewhat ironic as there has been a deliberate shift in leasing strategies among most retail landlords post-Covid-19 towards so-called “essential services” tenants.

Updates and results from Reits over the coming weeks will show just how widespread this concern over Pick n Pay is, and by May — when PnP reports interim numbers — we’ll know just how deep those cuts at the retailer will need to be to get it turned around. — Moneyweb.