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The World’s Second-Biggest Retail Owner Is Kicking Tenants Out

Legendary GE Chief Executive Jack Welch used to fire the worst-performing 10% of his workforce, a policy that big corporates like Amazon follow to this day. The world’s second largest retail owner does the same with underperforming tenants.

The new venue at Westfield London

At Bisnow London’s Retail: An Industry In Flux event, Unibail-Rodamco-Westfield Chief Financial Officer Jaap Tonckens explained how, as counterintuitive as it might seem in a world where retailers are closing stores at an unprecedented rate, the landlord is looking to cull retailers that don’t add anything to its centres.

In a keynote interview with Montagu Evans Head of Planning Julian Stephenson, Tonckens explained how the Paris and Amsterdam-listed company is trying to adapt to the rapid pace of change in retail, which goes way beyond the already-cliched idea of adding more food and beverage units. After the $16B acquisition of Westfield’s UK and U.S. business, Unibail will be focusing on selective development, more mixed-use and taking back space from struggling department stores.

And he defended the deal — which created a company with a €56B (£48.5B, $63B) portfolio of shopping centres in the UK, U.S. and Europe — in spite of accusations that Unibail paid too much at just the wrong time. 

Tenants are going bust, closing down stores or demanding rent cuts across U.S. and UK retail. Shopping centre owners could be desperate to keep as many retailers in place as possible. Not Unibail.

“Our objective is to turf out 10% of our tenants in all of our shopping centres every year, proactively,” he told the 200-person audience at London’s Cafe de Paris nightclub. “That is those that no longer fulfill a reason to be in a centre. Free-riders are not very interesting to us. Those that don’t drive footfall shouldn’t be in a centre, so they are a free-rider; turf them out.”

Tonckens said in order to succeed in retail real estate today, owners have to leave behind a mindset where they leased a store to a retailer for the highest rent possible for the longest time possible, in order to achieve a high capital value. 

“You need to get involved in your tenants’ business,” he said. “That is why short-term leases are actually better because it doesn’t cost as much [to kick them out], and if a tenant isn’t doing well they aren’t going to want to stay either. Just ask those investors that leased stores to [bankrupt UK department store] BHS for 30 years how it worked out for them.”

He said that one excellent strategy undertaken by Westfield before Unibail bought the company was forcing retailers that leased space at its two huge London malls, Westfield London and Westfield Stratford, to provide data on the turnover they made at their stores. This allowed it to gauge how well retailers were performing and weed out the weaker ones, and also set its rents more accurately. It is a strategy that will be rolled out more widely by the merged company.

“In the absence of turnover information, everyone is just guessing,” he said. “You end up charging the same rent for a grocer and a jeweller, which makes no sense. But people are afraid to change. They worry if they change, they are affecting the comparable rent for their next store. But a shopping centre is a living, breathing thing which changes according to the conditions in the market.”

Unibail's Jaap Tonckens

That change needs to include accepting when a concept or a place is no longer relevant, he said.

“Let’s face it, there are a lot of secondary places where with great effort they have been kept up, often with entertainment and dining, which now accounts for about 15% of stores in UK centres. But dining in the wrong location is not going to solve your problems.”

Landlords need to be more aggressive about cutting their losses and pivoting away when they misstep, Tonckens said. 

“We know we make mistakes, but you have to be willing to write down the value of assets and be ruthless, because if you don’t, you don’t have the flexibility to change and keep the real estate you have profitable or find an alternative use for it. Sitting on a centre you have bought and hoping to be bailed out doesn’t work, because the yields might compress, but not because the rents are going up.”

This last comment shows why the company is selling €4B of non-core assets in Europe, having already sold €2B. The proceeds will be used to pay down debt and fund its €12B development pipeline, he said.

Ousting underperformers opens room up for redevelopment, and Tonckens believes reconfiguring existing space, including taking back large units from department store retailers that are looking to reduce their footprint, is one of the biggest points of opportunity over the next few years. 

“There’s one of our shopping centres in London where we can’t wait for some of the department stores who have been in the news to vacate,” he said. “There is an opportunity to create a helluva more profitable use for it.”

Unibail will be moving its centres to becoming mixed-use destinations that use more than just retail to draw people in. At its Stratford City centre, Unibail is adding a 1,100-unit rented residential scheme, and in West London it is converting a former bus garage adjacent to Westfield London into a 3,000-capacity events venue.

In the case of London, it is likely to be office space, potentially coworking.

Westfield London

“A shopping centre is like a canvass, you create events, and create opportunities for people to discover the centre. We held a virtual reality event at Westfield London, and 75% of the people who came had never visited the centre before. It is about creating an all-encompassing place for people to enjoy themselves.”

There is, however, a caveat to this, which won’t please the owners of small or medium-sized malls.

“You need a canvass that’s big enough,” he said. “If it’s too small, you can’t afford to do this, as a lot of these things get paid for by the retailers. But footfall creates opportunities to be creative about generating more revenue. We have a video screen in New York that generates $20M a year in advertising revenue.”

And of course you need one thing above all others to make projects successful: money. 

“What is critically important is to have capital available to execute,” he said. “It is not just about talking about doing mixed-use, it’s about actually doing it. You need to know that a lot of the time investors [in your shares] have a shorter time frame than you, and that value creation takes time. You have to be very cold-eyed about where the opportunities are.”

Tonckens said that cold-eyed view for opportunities was behind its acquisition of Westfield, a massive purchase done at a time of significant uncertainty. Since the deal was announced in December 2017, shares in the company have dropped 27%, partly because in February Unibail announced that the assets acquired from Westfield had not performed as well as it had expected. Occupancy remains high at 95% and overall income grew in the UK and U.S., but like-for-like income did not. As a result, the company reduced its earnings guidance for 2019.

But Tonckens stands by the deal.

“The transaction created unique opportunities,” he said. “Opportunities come along when they do, not necessarily when you want them to. Had this transaction happened in 2015 when we first approached the Lowy family, it would have been a lot more expensive. If you’ve seen what’s happened with REIT pricing since 2018, then the transaction couldn’t have been done later than it was. So in this sense the timing was just about right. The fundamentals for it are there.”

Unibail took a lot of what Westfield does well on board and applied it to its own portfolio. As an example, he said the company expected to make an extra €40M of revenue by applying the commercial partnerships and specialty leasing deals at which Westfield has excelled to the rest of its portfolio. The Westfield brand will be rolled out across large malls in Continental Europe in September.

Westfield's mall at the World Trade Center

In terms of new schemes, it seems that for Unibail at the moment it will be as much about what it doesn’t choose to build as what it does commit to. For example, Unibail decided not to start developing a €1B Paris office scheme because it thinks it will be delivered during a recession. (Unibail is known for its retail, but it does have a small office presence.)

“When we think about new centres, it’s about demographics, and what does a catchment area fundamentally need. You wouldn’t build a 64-storey tower in the middle of the countryside. Connectivity is critically important, it has to be simple to get to. Public transportation is a critical component. People would love to live, work and play in the same place, so it’s critical to create that right environment.”

Only a fifth of Unibail’s €12B development portfolio is committed.

It will be interesting to see what schemes Unibail does choose to kick-start on both sides of the Atlantic. In the U.S. it is not planning any new malls, only extensions, and projects to add other uses like hotels and offices to existing schemes. In London, the key decision will be when to start its 2M SF joint venture scheme with Hammerson in South London — the scheme sits in the “committed” section of Unibail’s financial results, but earlier this year Hammerson said the scheme was under review to make sure it met the needs of future users.