Brazil mall landlords escape slump by renegotiating leases

Decisions by Brazilian shopping mall operators to cut tenants' rents are limiting store vacancies, sparing operators from the nation's harshest economic recession in eight decades and helping fuel a 45 percent jump in their shares this year.

Occupancy rates ranged between 93.8 percent and 98.1 percent in the second quarter, better-than-expected, yet, in most cases, slightly down from the first quarter, according to numbers provided by some of Brazil's listed mall firms. Analysts expect the numbers to remain around current levels, a sign of resilience.

By allowing tenants to pay less or parcel out rents for longer, mall landlords are offsetting a two-year decline in retail sales and declining household income, industry leaders said. Despite recent signs of reviving consumer sentiment, a recovery in retailing has a long way to go, they said.

"Albeit marginally, we have verified that vacancies have gone down thanks to these renegotiation accords between malls and store owners," said Luis Augusto Ildefonso da Silva, head of institutional relations at Alshop, a mall industry group.

The modifications to leases are similar to steps taken by banks, which raced to refinance hundreds of problematic loans from some of their top corporate clients, avoiding a jump in defaults and loan-loss provisions. Rent renegotiations, alongside expectations of lower borrowings, have helped mall stocks to outperform Brazil's benchmark Bovespa index.

Rent discounts, one of the few defensive tools at the disposal of the $47 billion industry to withstand defaults and vacancies, are likely to remain in effect this year and possibly in early 2017, said Cristina Betts, chief financial officer at Iguatemi Empresa de Shopping Centers SA.

Apart from negotiating with existing tenants, the lower rents could attract retailers with little or no presence in shopping malls, said Eduardo Prado, head of investor relations at Aliansce Shopping Centers SA.

That could help malls improve their tenant mix, replacing troubled tenants with those in a better situation, Prado said.

New operators are more likely to give rent discounts than high-end or more established players, Iguatemi's Betts said.

Still, indicators continue to show mixed readings, making it harder for investors to accurately predict the timing of a rebound.

Credit Suisse Securities analysts said a gauge of same-store sales points to a recovery gaining traction in coming months, with the indicator having already troughed in the prior quarter. Yet, Iflux, an indicator gauging mall attendance, fell 2.5 percent in August over the same month a year earlier.