An interesting hypothetical is posed in a Merrill Lynch report. What would happen to Westfield Retail Trust if Myer were to exit its portfolio? It shows just how much the department stores are struggling to hold their position. First, Merrill reckons it would lift the EPS quite substantially:
We have been asked by clients what the impact to WRT would be if, as an extreme hypothetical example, Westfield did not renew its leases to MYR.
Assuming Westfield is able to release the MYR space 70% to specs/30% anchors with only the loss of 20% of MYR’s selling space (allowing for corridors, access etc) and $2,000sqm conversion costs, we estimate WRT could lift EPS by 9% or, based on a 7% cap rate, $1.1bn of additional value, or 35cents/share to its current NTA of $3.21. WRT owns 39% the Westfield ANZ mall portfolio.
Then it gives the reasons, which do not look good for the department store world:
We estimate in the WRT portfolio MYR pays $135/sqm gross rent vs the other anchors’ $191/sqm and specialties/other at $1,217/sqm. The average MYR only sells around $3,100/sqm vs $9,800/sqm for specialty tenants and so at the very least from a mall perspective needs to improves its sales/sqm, which have not changed in 8 years, vs the major mall specialty sales/sqm up 28% (source CFX).
One wonders which clients are asking for this analysis given that it is a highly unlikely scenario. What is not a highly unlikely scenario is that general department stores are likely to come under continued pressure in our skewed economy. I’m not sure that speciality tenants are going to do particularly well, either, with the high $A boosting on-line purchases.
The Merrill report also compares Myer with PMV, the owner of Just Group:
Myer sells 58% less per sqm than Just Group ($3,100/sqm vs $7,200/sqm) Myer pays 86% less rent per sqm ($190/sqm vs $1,400/sqm) and total rent bill is only $10m more ($187m vs $177m). Myer occupies 8 times the space (1m sqm across 67 stores vs 125,000sqm across 966 stores)
Myer’s operating margins are 40% vs PMV at 60%. Myer’s ROFE is 21%, vs PMV’s 32%. Both rent rather than own, transferring real estate value of $3.1bn and $1.8bn to the landlords (based on 6% and 8% cap rates)
As an extreme hypothetical scenario, we estimate WRT could lift EPS by 10% and NTA by 9% if it converted all its MYR to a mix of specialty and other anchors on a 70:30 split, using a 7% cap rate – higher than the 6.2% cap rate average.). We stress this is unlikely to happen over the 11 year period of weighted average lease duration, given the $1bn+ of sales MYR earns within Westfield’s malls, who owns 17 of the top 20 Au malls by sales.
All well and good but given the overcapacity in all forms of retail we’re seeing currently, you have to ask if Westfield could possibly fill any gap left behind by Myer leaving the building.
Which leads me to wonder if the pressure currently being applied to Westfield’s monopoly rents across its client base has led it to request this research.