Shopping Center Owners - Act Now or Lose Your Shirt
Headlines declaring store closures and bankruptcies have become everyday news and spell big trouble for many shopping center owners. The pace of store closures, layoffs and liquidations has accelerated in the first quarter of 2009 after a dismal Holiday selling season with national chains such as Circuit City, Linens'n'Things and Mervyn's leading the way. As retail sales continue their downward spiral, we are seeing an even more troubling trend that many bankrupt retail chains are opting for outright liquidation as opposed to reorganization.
In addition to being confronted by store closures, many shopping center owners also face substantial pressures from their lenders and demands for relief from their struggling tenants. For these owners and their tenants there will be no Federal bailout. To make matters worse, some otherwise healthy tenants may choose to exercise co-tenancy provisions in their leases entitling them to terminate if other key tenants have gone dark. For example, the closure of a Circuit City store might trigger co-tenancy termination rights in a neighboring Ethan Allen store's lease. To add to these pressures, many renovation and new construction projects financed between 2005 and 2008 are substantially over-leveraged. Almost none of these projects can be refinanced at, or anywhere near, their current debt levels. As sponsors go over budget due to slow lease-up or shop closures, they are struggling to find the capital to complete their projects – existing sources of financing have dried-up and new capital seems to be unavailable.
While these are huge problems for some shopping center owners, the current economy also presents big opportunities for those that can stabilize their portfolios and access capital in order to acquire properties at historically attractive prices. We believe the gap between the haves and have-nots will expand much more quickly this year, and to quote the old adage, "Bad news does not improve with age". In order to come out on top, shopping center owners must act now.
This is the time to develop a working strategic business plan that is believable to both existing lenders who may be circling the wagons and to potential new sources of capital. Owners need to be proactive, not reactive. If the debt is in default or soon will be, the borrower must present a comprehensive, credible plan to the existing lenders that will convince them that foreclosure or other available options are inferior to the plan being presented. The operator must make realistic assumptions about improvement and re-tenanting costs, downtime, market rents and the type of replacement tenants they expect to attract. If struggling tenants are demanding relief, owners need to see beyond pleas for bailouts and threats of going dark and look to the financial condition, business plan viability and merchandising strategy of tenants, because only the strong and smart will survive.
In some cases where the lender relationship has been damaged, the owner/operator will face perhaps an even greater challenge: to convince the lenders that they should remain in control. There are many situations in which the owner/operator has presented to lenders a number of forecasts that repeatedly have not been met, or in approaching a workout scenario, has made unrealistic demands that the lender has rejected. In cases where the lender or investor relationship has greatly deteriorated, it becomes imperative that owners seek objective, outside assistance from experienced debt restructuring professionals to ensure that credibility is restored. If credibility is lost, then even the best conceived plan won't be believed and accepted, and both sponsor and lender will lose.
If there is a projected capital need, it is too great a risk to assume the existing lenders will help, so alternative funding sources need to be identified. The process of raising capital in today’s distressed environment differs considerably from the boom times, when lenders were competing aggressively for deals. It is no longer a "borrower's market" and there must be a new strategy as one vies to gain the attention of potential investors with capital to deploy. Companies need to organize a process and take decisive action not only to engage with existing sources of capital, but also to identify sources that will develop over the next year. Owner/operators, existing lenders and other stakeholders need to be much more flexible and willing to accept what the capital markets have to offer. Capital markets are severely dislocated, and traditional sources no longer have funds to invest. New capital sources, many of which are offshore, are much harder to identify and their investment parameters vary greatly.
Existing financing sources and stakeholders need to be persuaded to accommodate new investor requirements, which is a complex balancing act. Restructuring of existing debt obligations, necessary to pave the way for new capital, will be greatly complicated by the widespread use of multi-layered capital structures and securitization in recent years. The owner's daunting challenge is to build a compelling, realistic business case and survival/recovery plan that enables parties with differing agendas to find common ground and move forward.
Few property owners have direct experience restructuring debt in distress situations or dealing with bankruptcy and insolvency issues. This is understandable because, as a nation, we have not experienced as severe a real estate downturn for nearly 20 years. To achieve success, it is necessary to understand lender motivations, how to formulate business plans and restructuring proposals that will be accepted by bank workout groups, and how to manage complex restructuring negotiations with multiple stakeholders. There are no "do-overs" in the workout world. If you get off on the wrong foot, it may not be possible to get back on track. You have to make sure you deal with the key decision makers, understand the lender’s particular considerations and decision making process, and develop and present a business plan that your lender will accept. This level of understanding only comes from years of experience, and underscores the value of hiring a battle–tested, third-party financial advisor who is an expert at complex debt restructuring, has credibility with financial institutions, can help source urgently needed new capital, and can mitigate personal guaranty exposure. The right advisor will help you avoid critical missteps that undermine the entire restructuring process and may cause extreme adverse consequences such as lender foreclosures and guaranty demands that expose the owner to potentially massive liability.
In the current environment, the common wisdom is that just surviving is success. However, we should not settle on merely surviving, but on thriving. Ideally, owner/operators will want to both address their current and potential problems and position themselves with financial partners to act quickly on opportunities that will arise in today’s turbulent market. Those who are successful at both will emerge as the big winners over the next few years, while those who are only focused on survival may miss out on a secular opportunity for wealth creation.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.