rurenga, kitty,
Shopping centre leases for a retail chain is an interesting and important issue.
If a retailer owns its sites, it has large, lumpy, dull and illiquid assets on its balance sheet.
Where it leases, it contracts major long term liabilities that appear on the other side of the balance sheet.
Under both forms of tenancy, retailer profitability is exquisitely sensitive to sales volumes: flourishing in good times and struggling when consumption is flat.
Sidney Myer built this enterprise by, among other things, advertising heavily and trading at sharp margins during the downturns when other retailers were pulling their heads in. He was great at seizing market share and thereby busting his rivals during downturns. To do this, he needed access to plentiful liquidity in the bad times, so he generally sought to own sites as collateral foundations for his counter-cyclical actions.
When a retailer passes through the hands of private equity as MYR did, the instinctive response of PE is to sell the properties, release the capital and return it to holders (themselves).
And they went further, limiting and replacing with debt the staggeringly large working capital MYR used to constantly refresh its offering and provide the flexibility to ruthlessly purge by discounting the inevitable purchasing mistakes.
PE, being masters of the universe, knew better than MYR retail management and removed both the freeholds and working capital, disregarding or not even appreciating the power of these features and their dynamic application through the cycle.
The rights issue of September 2015 largely restored MYR's working capital position and left it almost debt free (2-5 at 94c, ouch in hindsight). But it still lacks the financial flexibility of owning its free-standing sites.
It cannot own mall locations, but this is offset by the fact department stores are major anchors for the malls and let on very generous terms.
I am not suggesting MYR should rush out and buy all its sites back. When the inevitable commercial RE downturn happens, MYR can selectively pick up for a song these assets which it knows very well. It needs to be in a strong financial position to do it.
Ash
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