Myer, DJs working with landlords on some non-performing store leases

Myer has about 60 stores, with lease agreements that range from five to 60 years. Picture: Jason Edwards

Department stores Myer and David Jones are believed to be nearing a deal with at least one of their major landlords to recut lease agreements on some non-performing stores within their portfolios, say sources.

It comes as DataRoom revealed that David Jones had hired restructuring firm KordaMentha in recent months in what the company says is a move to assist with its real estate.

Sources have told DataRoom that an agreement may have already been reached with Vicinity Centres, which owns high profile malls such as Chatswood Chase in Sydney and half of Melbourne’s iconic Chadstone mall.

This involves David Jones and Myer only paying for rent at a per centage of their turnover in stores that are non-performing, rather than any additional rent.

These types of leases with turnover provisions are historically ascribed to grocery stores within malls.

However, it remains unclear whether this would be a temporary relief measure or if this would be a permanent change to the arrangements.

A Vicinity spokeswoman said the mall owner did not comment on commercial arrangements with its retailers.

Typically, retail leases for tenants such as department stores are for a fixed term, with fixed or market reviews throughout the term.

Australian Westfield malls owner Scentre Group typically offers five-year leases, with increases in line with inflation and about an additional two or three per cent annually, say market experts.

However, this arrangement is not for large format stores.

Sources say that Scentre Group could be close to reaching a similar agreement on non-performing locations.

Earlier, it was understood that Myer was believed to be asking its landlords for shorter lease agreements and to exit some of its malls, after they remained closed for weeks because of the coronavirus crisis.

Myer has told some suppliers that it would open all of its stores this week, while David Jones malls are all open.

The move comes as the Myer share price sits at about 27c, taking its market value to just $222m, rallying since the easing of COVID-19 restrictions.

Myer has about 60 stores, with lease agreements that range from five to 60 years. It is understood the department store has wanted to shorten some of its leases, and exit certain malls altogether.

However, analysts say solving the problem is not clear cut.

Myer negotiates leases with certain major landlords — such as Westfield owner Scentre Group, AMP, Lendlease and Vicinity Centres — as package deals rather than on an individual basis.

Analysts had earlier predicted that Myer would likely want to exit its stores at its Parramatta, Eastgardens, Bankstown, Liverpool, Penrith and Shellharbour locations in NSW.

In Melbourne and some regional locations, this would also probably be the case for Frankston, Mount Gravatt, Werribee, Bendigo and Albury.

In Western Australia, the thinking is that an exit from the Joondalup mall would also be sought, as would a departure from the Carindale mall in Brisbane.

The 60 stores generate about $2.9bn in sales, while rival David Jones has 47 stores and a turnover of around $1.8bn.

Department stores are struggling worldwide, with Macy’s in the US recently standing down thousands of workers and JC Penney this month filing for Chapter 11 Bankruptcy in the United States.

Extracting itself from its leases was always expected to involve a fair amount of horse-trading, yet department stores typically pay low rents.

The challenge for landlords is the lack of additional tenants lining up to take the vast amount of area occupied by Myer and David Jones, with global fashion labels no longer cutting a track to Australia to open stores in this market.

Landlords in recent years have put on a brave face, saying the vacancies left by struggling apparel retailers were being replaced by food and lifestyle outlets.