BHS: landlords, stores and expert analysis

A sad end. Many good loyal people now jobless. Let’s hope #retailagents and #landlords can help create new ones #BHS https://t.co/GlFaOCsXCB

— Ed Smith (@edsmith86) June 2, 2016

Very sad news. Now confirmed we need to put some thought into how we fill a massive void in Eastgate St #Gloucester https://t.co/kK32ZKyoVu — Rob Ellis (@robellis82) June 2, 2016

V sad news for the hard working & honest employees. Previous owners must surely be pleased with their hard work. https://t.co/zFxXWIk4IW — Jack Panton (@JackPanton) June 2, 2016

The proposed BHS CVA has caused mass disruption in the property industry. With rents being slashed by as much as 75% on its 164-strong portfolio, landlords have been exposed to the beleaguered department’s stores troubles en masse.

However, Estates Gazette can reveal that many of them are leaning towards an approval of the CVA. Since BHS and KPMG’s announcement of the proposed CVA on 3 March, the news has already begun to rock the boat not just for landlords, but the investment market too.

If approved, BHS’s rent roll across its portfolio could reduce from £92m to £76m. The BHS portfolio has been divided into three categories. These include the 77 shops that will be unaffected, 47 that will suffer rent reductions but are still considered viable, and the 40 which will have rents slashed so severely that they are on the cusp of closure.

THE STORES

Map of BHS stores and categories

Hover over the circles to see details and landlords

Click here to see a full size map

Click here to read the portfolio list

WHAT HAPPENS NOW?

• Q: Why are landlords veering towards approving a CVA?

A: In the week since the CVA announcement, landlords have shown initial signs of approving the process. For many, it is the best, and only, option. Landlords with BHS anchors in secondary shopping centres would struggle to re-let the space. Although they have been cut a sore deal with the rent reductions, in these instances reduced rent is preferable to no rent, which would be the alternative option if the business went into liquidation.

However, landlords that have a BHS clogging up what would otherwise be prime lettable space in dominant shopping centres would rather see the back of them. But the latter are the minority in this situation. Discussions are still ongoing, and with over a week until the creditors’ meeting, there is still scope for a change of tune.

• Q: What is the process for approval?

A: For the CVA to go ahead, 75% of BHS’s creditors have to vote in favour of it. The creditors meeting takes place on 23 March, with votes due in on 22 March. Landlords have the option to vote on their preference for individual properties, giving those with mass exposure the opportunity to vote both for and against it. If the CVA goes ahead, it will take effect from 29 March.

The cash saved from the cost-cutting exercise would then be injected back into the business to fund a turnaround, including installing food offerings into shops and modernising its online offer.

• Q: How much does BHS want to reduce its rents by?

A: BHS currently pays around £91m a year in rent across its estate, and is looking to cut that figure by about 30% – a reduction of £27m.

BHS' flagship store, Oxford Street, W1 — BHS’ flagship store, Oxford Street, W1

This would not include the various BHS stores let on long leases at low rents, presenting an opportunity for uplift.

There are roughly 15 examples of assets which are under-rented. BHS’s flagship on Oxford Street, W1, is a prime example of where the retailer is renting the space below market value and has another 46 years left on its lease.

It pays around £3m pa for the 100,000 sq ft space, which could be leased for as much as £8m pa along with office space on the upper floors.

As a result the lease is a potential asset worth up to £85m which could be used to help fund the future of the business. It is already in discussions with Ikea and Polish fashion brand Reserved to sub-let the space to maximise the value of its own lease. However, in order to attract Ikea and Reserved, reconfiguration and refurbishment is needed, which BHS does not have the cash to fund prior to a CVA.

Some of BHS’s stores are being rented at dramatically above market rents – for example, it pays around £800,000 pa for its 40,000 sq ft shop in Gloucester at Aviva Investors’ Kings Walk, where the market value for the long lease is closer to £450,000.

• Q: What does each category mean?

A: Administrators at KPMG have split BHS’s portfolio into three sections.

Category	No of shops	Status
1	77	Unaffected
2	47	–
2a	–	Pay 75% of current rent
2b	–	Pay 50% of current rent
3	40	Pay 20% rent for a period of 10 months, then consider closure

The first category, which includes the majority of BHS’ prime London locations including Oxford Street, will be unaffected.
The 47 shops in category 2 are considered viable if rents can be reduced to market levels.
The shops in the third category are likely to close if landlords do not agree to the CVA.

Under the terms of the CVA all assets can continue to trade as normal.

Click here for a full list of the shops and landlords in each category

• Q: Which landlords are most exposed?

A: The scale and regional reach of the BHS portfolio means many landlords are exposed to this process. Land Securities and Kennedy Wilson both have two leases in the third category. Hammerson, Aviva, Standard Life, Ellandi and the Crown Estate are among those affected in category three.

Click here for a full list of affected landlords

• Q: How has it affected the investment market?

A: The tribulations of BHS have been long known in the market and widely publicised since before Sir Philip Green sold the struggling business to Retail Acquisitions for £1 in March last year.

This prompted landlords and retail investors to consider their options for BHS space which they own, particularly in instances where they have been looking to buy or sell assets. This has caused deliberations for forthcoming assets to the market, as well as delays in the exchange of deals processed, where investment prices could be affected due to the proposed rent cuts.

There are various potential retail investments included in category 3 which could be affected. Resolution Properties has instructed CBRE to explore options of a sale of Ocean Terminal Shopping Centre in Edinburgh, which is valued at around £80m – a 6.5% yield –but no decision has been made yet as to whether it will opt for a sale.

Another retail investment asset with a category 3 BHS is Redefine International, which has been pondering a sale of its Grand Arcade Shopping Centre in Wigan. The sale, which was being marketed by KLM and is valued at £116m – a 6% yield – has been put on hold.

There is also the possibility that investment deals that have not yet closed could lag as a result. Aviva will have to consider its options for the proposed £23m sale of King’s Walk shopping centre in Gloucester, where a category 3 BHS is paying £800,000 for the lease.

WORD ON THE HIGH STREET

Expert analysis, Amber Rolt

The BHS CVA proposal has brought the controversial restructuring tactic for struggling businesses back into the limelight. A life support machine for businesses on the cusp of going bust – it can either give them the lease of life they need, or act as a means to prolonging an inevitable death.

Those companies that have in the past agreed CVAs have gone on to mixed success.

Some have had to call in the administrators anyway, making for a longer, more painful process. The late Focus DIY chain is a prime example. Its landlords supported a CVA back in 2009, but along with many businesses which opted for CVA in the aftermath of the recession, it did not work out.

More recently there have been success stories. Last year Deloitte managed to save Mamas & Papas through a CVA. Of its 63 shops, it classified 25 as commercially unviable, slashed rents by 50% on those stores, as well a 25% rent cut on an additional 10 shops, and it worked.

But it worked because it had a viable business model and offer. Regardless of the changing retail landscape, people are always going to buy baby fodder. The future of whether people will always want to buy cardigans from BHS is not as clear.

This BHS saga will go down in history as one of the UK high street’s most prominent battles for survival amidst a changing retail landscape. It has found itself in this situation not just because of its disastrously over-rented portfolio, but because of its struggle to evolve to secure itself a place in the future of retail.

It is no coincidence that similarly beleaguered department store Beales has found itself inthe same boat only a week after BHS pushed the CVA button. The question that many are asking, despite landlords mostly rolling over, is not whether BHS will survive, but if it should?

BHS needs to seriously reconsider its offering, but that requires a substantial amount of cash, which it currently does not have. It needs to free up cash from the CVA to pull itself back on its feet. Boss Darren Topp has already begun making his case for the future of the business. It needs a more compelling online offer and is looking into installing food outlets into its shops.

Cash could also be put towards reconfiguring some of its under-rented existing long leaseholds in prominent locations, giving it the option to sub-let them. Plans are in motion for this to happen at its Oxford Street flagship, W1, but in the midst of the CVA chaos, these plans appear to have been put on hold.

Landlords are currently swaying towards approving the CVA and if they do, BHS will have the chance of a new lease of life.

If rejected, it would mean a lot of black holes in shopping centres across the country, some of which could take a long time to fill.

FROM THE ARCHIVE

• Research: retail sector plummets 23%

Retail investment fell 23% in 2015 compared to the previous year as 12 high-profile shopping centre deals failed to cross the finishing line

To send feedback, e-mail amber.rolt@estatesgazette.com or tweet @AmberRoltEG or @estatesgazette

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NEWS, COMMENT AND ANALYSIS

• Landlords grab back the best of what’s left in BHS’s portfolio

• Sherwood says he exceeded BHS targets

Live from the BHS inquiry

Estates Gazette is covering the BHS inquiry live. Follow us on Twitter @estatesgazette to see the story unfold.

Sir Philip Green appears at BHS hearing