Second wave of Covid has increased pressures on mall operator cashflows: ICRA

NEW DELHI: The retail real estate sector, which had recently begun showing some signs of recovery after being hit hard by the first wave of the Covid-19 pandemic, is once again facing considerable challenges on the back of the rapidly spreading second wave, with rising Covid cases leading to increased restrictions and economic uncertainties.

After having to extend rental waivers in FY21, the mall operators are once again having to extend rental waivers/concessions in the current year, given the current reduction in footfalls and consequent retail spends, particularly in geographies facing high curbs.

The weakening financial profile of tenants, particularly of highly impacted sectors, such as multiplexes, family entertainment centers, food courts and restaurants, is further exacerbating the situation.

Thus, rental collections are likely to remain under pressure, at least over the near term. In the absence of any support to the retail realty sector, such as the moratorium on debt obligations, which was available during March-August 2020, the extent of liquidity and financial flexibility available with mall operators will remain a critical determinant of their ability to tide over the cash flow disruptions.

Mahi Agarwal, sector head and assistant vice president at ICRA, said, “the net operating income (NOI) of mall operators is getting hit by the fresh localised restrictions being imposed by states, which, in turn, is further impacting debt coverage and protection metrics. The larger players were able to tide over the earlier disruptions on the back of diversified revenue streams from varied segments, available liquidity and strong tenant profile. Smaller players, however, faced challenges given their lower diversification and portfolio strength, limited liquidity and credit availability.”

The consequently expected reduction in NOI is leading to concerns, given the fixed nature of debt obligations under a lease rental discounting structure, particularly in the absence of Government support measures.

Malls having considerable dependence on tenants from highly impacted sectors are facing an even deeper impact, with risks of disruptions in monthly rent payments as well as increased vacancies rising considerably. Multiplexes, family entertainment centers (FECs), food courts and restaurants, typically, contribute to around 20-25% of the total mall area at present. Notably, these segments also serve as key drivers of mall footfalls, and an impact on their operations have a cascading impact on the overall performance of the mall.

Differentiated performance is also expected amongst the retail stores that comprise the balance 75-80% of the mall’s leased area.

Thus, strength and diversity of tenants will continue to play an important role in the mall’s ability to tide over and recover from the impact of this second wave.

“Most investment grade entities would also have Debt Service Reserve Accounts (DSRA) equivalent to one to three months of debt servicing requirements, although timely utilisation of the same by the lenders in case of any shortfall will remain critical for keeping debt servicing satisfactory. Overall, availability of adequate liquidity and financial flexibility would remain the key. Smaller players, who make up the majority of the market, with limited resources are likely to face the brunt of the challenges,” Agarwal concluded.