COVID... We Need to Fairly Share the Burden

I am not the type of person to begrudge any business that makes a profit. After all, this is the main financial objective of most businesses, including Salta Properties. And most businesses do so fairly and ethically, using their skills, expertise, grit and determination to run successfully.

Regrettably, in this COVID world, examples have emerged of businesses receiving government assistance and taking rent relief from landlords while improving their profits. 

The Australian Financial Review today reported that Premier Group’s sales for the 26 weeks ending July 2020 were down 18 percent. It reports further that with online sales, receipt of JobKeeper and its “hard-line refusal to pay rent on shuttered stores”, Premier’s earnings before interest and tax will come in at around $59 million (up 10% on last year).

This seems to suggest that savings generated from non-payment of rent, and the benefits afforded by the JobKeeper payments from the public purse, have meant that whilst Premier has benefitted from the commercial environment during COVID-19, it seems to have done so in large part as a result of the largesse of the taxpayer and the hundreds of thousands of shareholders who are investors in listed landlords such as Vicinity, Scentre Group and GPT. 

This is surely not the intention of the JobKeeper program, nor the Government’s Landlord / Tenant Code of Conduct. In these terrible times, most businesses are aiming to maintain viability whilst complying with their commercial obligations. That means businesses should only look for temporary changes to obligations as is necessary to protect their viability (not profit). The intent of the Landlord / Tenant Code of Conduct is to protect vulnerable businesses, not to enhance the profits of strong ones. The Financial Review has pointed out that large retailers have been vocal influencers of the design of both the JobKeeper program and the Landlord / Tenant Code – and why not, it has been a windfall for some of them!

It seems to me that in these times, we need to shine a light on businesses that are happily receiving assistance from government and landlords when they don’t require it. The obligation of each participant in the economy at this time is to do what you can to keep your business viable before you start relying on others (who are also trying to stay viable). Surely, we all need to focus on getting through this? If you can make a profit in this environment, that is great, but not when it comes at the expense of others, and particularly not at the expense of the taxpayer or the mum and dad investor.

The Federal and State Governments should make those businesses that have increased their profits while receiving JobKeeper payments and rent relief from landlords repay the support they have received back to government. Also, is it fair that the shareholders of the listed property trusts and other private investors should be taking money out of their pockets and putting it into the pockets of the shareholders of large corporate tenants who have chosen not to pay their rent, even though they are still profitable? It is an unacceptable and unfair transfer of economic value from one group of shareholders to another.

It is also worth mentioning Premier’s suggestions regarding paying rent based only on a percentage of its sales. This will never work. Landlords have large up-front fixed costs (the property purchase), largely fixed expenses (interest costs, land tax, rates and other taxes), and low margins – most property yields are in the range of 4.5% to 6.0%. The landlord model to manage this risk is to seek agreement from its tenant to pay fixed rents for an agreed period of time.

Premier’s proposal suggests that the landlord should be responsible for the performance of the tenant’s business by varying the rent to match the tenant’s sales. Is this idea hatched by a business that is not confident in its own ability to run its business, or alternatively is it designed to gouge the landlord? The tenant generates sales and profit though the product they offer, the price they charge, the services they provide to their customers, their buying strategy and product mix, and their supply chain arrangements. A tenant’s property cost is only one component of the tenant’s cost base and it is a predictable one – because landlords enter into arrangements that obligates them to supply the tenant with use of the property for a pre- agreed price. It is self-interest of the first order for a tenant to suggest that a landlord should ‘take a risk’ on the tenant’s business by having a fully variable rent based on sales. It is safe to assume the retailer does not want to the landlord to have any say in how they run their business. If this is true, then why should the landlord rely on the tenant’s ability to pay rent based solely on how well they run the business?

Premier relies on the strength of its brands and its property footprint to assume that landlords will go along with its demands. As mentioned in James Thomson’s page 16 article in today’s The Financial Review, Premier has allowed 70% of its leases to expire and is occupying under month to month arrangements. This may be so that pressure can be brought to bear on landlords to bend to its demands on percentage rent. However, this is both a strength and a weakness for Premier because month to month arrangements also give landlords the ability to ask Premier to leave. Premier will be relying on the strength of its brands to assume that landlords will not take this step, but don’t forget Premier also needs a retail footprint to maintain its own market presence. Where would it leave Premier if every landlord asked it to vacate?

It is time that we all weigh up how our own brand ethics should be reflected in how we run our businesses and decide if we want to support businesses which at the same time as they are making large profits are receiving JobKeeper and rent relief.  I wonder what the court of public opinion will say?