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Giant retail landlord Klepierre rules out large-scale move to turnover rents

European retail landlord Klépierre will not allow a turnover-rent business model to be forced on the company despite growing pressure from the retail industry, Chairman Jean-Marc Jestin said during a first-half earnings call.

The France-based landlord, which owns a portfolio of retail assets worth €22.83 billion across Europe has been severely impacted by the COVID-19 pandemic, which forced the lockdown of many of its properties. Many of its tenants have been unable to pay rent for the second and third quarters of 2020 due to the loss of income.

Turnover-based rents, where a tenant's rent is based on how much revenue it takes in, have become widespread in the retail sector following the COVID-19 lockdowns as landlords help struggling retailers through the crisis. They were already gaining prominence in the retail sector before the pandemic as the rapid growth of e-commerce put an increasing number of brick-and-mortar retailers out of business.

"Some tenants are very vocal about what they would like us to do," said Jestin. "But we can say what we are not going to do. We are not going to switch from the current lease structure with [minimum guaranteed rents] plus sales to only sales-based rent."

Klepierre has a "very limited number of leases that are pure sales-based rent," Jestin added, and other leases that are a mixture of both fixed rent and turnover-based rent. Of the €45 million of sales-based rent that Klepierre receives, around a half comes from pure sales-based leases, Jestin said.

"We are not going to change the business model," he added. "We are going to provide support to our retailers. Probably first to the ones who need it the most, and it will take different forms, but we are not going to change the structure."

Christope Cuvillier, the CEO of Klepierre peer Unibail-Rodamco-Westfield, similarly ruled out a switch to "pure variable rents" during a July 29 earnings call.

Klepierre collected 83% of non-deferred rents and service charges due in the first half of 2020. The collection rate for the second quarter stood at 62%.

Around a third of the €341 million rents invoiced for Q2 were deferred due to "the cash position of our retailers," said Jestin. In total, for the first half of the year, €221 million in rents and service charge remained to be paid as of June 30, he added.

"Rent collection has been impacted by the lockdown period either because we decided to defer payment [or] because retailers postponed payments on their own, or due to grace periods decided by some governments," Jestin said.

Klepierre properties that were closed during lockdown its assets in Norway, Sweden, and the Netherlands remained open have been reopening since early May. All properties are now open, although some stores remain closed.

While Jestin said he was "positively pleased with the pace of recovery" as footfall has returned to more than 80% in all locations, he acknowledged when pressed by an analyst that the crisis was far from over and risks remained.

"We have the leases of our main tenants that represent a significant portion of our [rent] roll," he said. "We believe that most of them have the capacity to get through this crisis. But I will be very modest and humble in answering the question: We are facing something which is unprecedented, so [it is] difficult to predict the future."