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Location is Everything Podcast

Episode #10

Location is Everything Summit: Post-COVID Leasing (Trends, Impacts, and Strategies)

At our 2nd annual Location is Everything Summit, speakers from GNC and Lush, joined us in an interesting roundtable about leasing trends, impacts, and strategies in a post-pandemic environment. Access the full summit on-demand: https://resources.tangoanalytics.com/location-is-everything-summit-2021
Location is Everything
Location is Everything
Location is Everything Summit: Post-COVID Leasing (Trends, Impacts, and Strategies)
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In this Episode

At our 2nd annual Location is Everything Summit, speakers from GNC and Lush, joined us in an interesting roundtable about leasing trends, impacts, and strategies in a post-pandemic environment.

Access the full summit on-demand:

https://resources.tangoanalytics.com/location-is-everything-summit-2021

  • Transcript

Episode Transcript

Bart Waldeck:

Hi, everyone, and welcome to our next session on Location is Everything. The next group is going to talk about Post-COVID Leasing: Trends, Impacts, and Strategies. And we’re joined by our friends at GNC and Lush. And our session will be moderated by Tango’s Rick Zelinsky. I will turn it over to you, Rick, to do some introductions.

Rick Zelinsky:

Sounds great, Bart. Thank you. So just a little over a year ago, Lease Administration Operations were significantly impacted by a global pandemic that shuttered retail stores and had tenants scrambling to determine their financial obligations. And while those events have now adjusted for the new normal in retail operations, I think there’s some lasting impacts that have been fairly profound through this event. So in today’s session, we’re going to just have a roundtable discussion, talking through some of those trends and impacts and strategies that a couple of the retailers that we work with are applying to their Lease Administration Operations.

So with that, I will start with an introduction of myself. I’m Rick Zelinsky. I’m VP of Product Strategy at Tango, and have been involved in real estate technology for over 25 years, predominantly from the purveyor of software products and also as a client myself for a number of years. Kim and then Alyssa, if you please could provide introductions as well.

Kim DelGuzzi:

Hi. My name is Kim DelGuzzi. I’m the Director of Lease Administration at GNC. I’ve been in the lease admin space about 20 years, and I’ve worked on it from both the landlord and the tenant side. So I think I’d bring a unique perspective to this arena area.

Alyssa Gates:

Hi. I’m Alyssa Gates, and I’m the Property Director for Lush Cosmetics. And that includes leasing design, construction, and even our woodshop. I’ve also been in the business for over 20 years. So interesting perspective, I have never been on the landlord side. We represented tenants. So it’s been a very interesting year from a tenant perspective.

Rick:

To say the least, Alyssa. So thank you for the introductions. And so, in today’s forum, we’re just going to use this as a roundtable. So there’s no slideware for the audience, you’re just going to see our faces through the presentation. So let’s just get right into it, into some of these topics. So I think perhaps as a starting point, I thought we would maybe talk about co-tenancy. So if I think back to co-tenancy, and the one-on-one explanation, obviously, co-tenancy is provisions that are giving tenant opportunities to have relief when either occupancy is reduced or anchors leave a center.

And this has been something that’s been traditionally common concept in retail leases for decades. And I think as COVID began and tenants were really trying to figure out what could they do in regards to getting relief from rent when they had retail stores that were forced closed and sales that were nonexistent, co-tenancy was one of those topics that came up. So, obviously, going back, tenants were using it as potential opportunity to look at occupancy. Because in fact, there was no occupancy. But I think probably more has transpired in this regard over time.

So I guess, Alyssa, I would start with you and ask for some feedback relative to what did co-tenancy look like for Lush relative to COVID and its impacts. Is that something that thinking back what seems like, literally a year ago, but seems like 10 years ago. Was that something that you dealt with then? And is that something that has changed over time?

Alyssa:

Definitely, yeah. It was something that we immediately started looking into and dig into. But one of the things that we were up against was that when COVID hit and we were closing shops, we held back on paying rent in terms of negotiations with the landlords in trying to find that abatement or that rent relief we’re needing to survive. So what that did is put us into a co-tenancy default situation for not paying rent. Therefore, we could not execute the co-tenancy provisions that we had already established in the leases. So those are the couple things that we were up against.

And then as it became more apparent that we were going to have to go through different layers of rent abatement and negotiations, I became a really big point of negotiation for the landlords. That was something that we would have to toll for a period of time until all shops were open and the world was back to some sort of normalcy. So for us, it could have been anywhere from January of ’21 through December of ’22, where we’ve told that co-tenancy certainly an issue all around for landlords to see that occupancy go back up.

And I think that for a lot of the major landlords, I’ve actually seen them become tenants themselves. They purchased … that were in bankruptcy in order to maintain that co-tenancy, because it was less expensive for them to do that than to lose the occupancy and have all their tenants go in co-tenancy.

Rick:

Interesting, yeah. And obviously, the changes are significant in terms of what we’ve seen. Kim, I know GNC is a different business at a different point in its lifecycle. And what does this look like for you guys relative to co-tenancy both early on and where things have gone from there?

Kim:

For me, I think we experienced some similar challenges like Alyssa spoke about. Because early in the pandemic, we were actively seeking rent deferrals, rent abatements, which it was hard for the landlords to grant that as we held back rent as well. GNC, actually, we filed for bankruptcy early in June, so then it took on a different approach. We were going to the landlord’s actively asking for rent reductions on leases that we wanted to assume. So as part of that concession, the landlord deleted the co-tenancy provision in a lot of our leases.

So I think that was where the difference was. If there were centers that were underperforming or where there were vacancies existed, we took a pretty hard look as to whether we wanted to stay in that center all together. So even going forward, the co-tenancy provision is important to us. Not to say that’s not important, but we evaluated all of our stores globally. And so, I think the centers that we want to be in are the ones that we’re in right now.

Rick:

Got it. So that makes complete sense. And when I think of co-tenancy going years back, a lot was built around anchors. And these department stores and mall survived because of anchors. And I think we know all the stories of the anchors that have gone under or had less impact. And certainly, we’ve evolved the mall and retail strategy in general. So, Alyssa, am I looking at this right? Do we think that there’s been an evolution of–not only the importance of co-tenancy, but who is considered co-tenancy and what’s most important in some of these centers in this regard?

Alyssa:

Yeah, I think it’s evolved. So the department store doesn’t have the same appeal or presence that it once did for shopping centers or for driving traffic. People are looking for entertainment. They’re looking for the accessibility. So for us, when a department store has gone dark, it’s more of that dark door being an issue for us than it is actually losing the sales and the goods that that anchor was selling. So that does hurt us as a business. We can definitely see a drop in traffic when a door closes.

Rick:

Got you. And just to clarify there, dark door meaning it reduces an entrance point to an enclosed mall as an example.

Alyssa:

And I think through this pandemic, too, folks have been more apt to wanting to shop in an outdoor environment, so they aren’t as engaged to walk through an enclosed shopping center as they once were. So some of those lifestyle centers are some of those downtown anchored centers are actually better for us currently.

Rick:

Yeah. And interestingly, I live outside of Chicago. And I would always want, especially in the winter, to look at those enclosed malls, but I think everybody has been rethinking where they want to shop. So that doesn’t surprise me in the lease, that the outdoor centers are obviously more popular these days. So I think, overall, it sounds like co-tenancy, this was something that didn’t really get taken advantage of relative to rent relief because other abatements were taken. So thus, these provisions couldn’t be exercised.

And I guess moving forward, it sounds like the trends here are while co-tenancy and dark doors and empty spaces are definitely still important, it’s less around the big anchors. And it’s more around just having them all be occupied and probably maybe something that it’s not as critical to negotiate, maybe as perhaps compared to some of the other terms that we’ll talk about as we go through this a bit. So let’s shift gears from co-tenancy and let’s talk about percentage rent.

And percentage rent, for me, just being around the technology side of this has always been something that’s very complex. And I think one of the benefits of having a lease administration system, predominantly for a retailer, is around the ability to calculate percentage rent. And I’m sure you guys have plenty of stories of all the nuances in some of those leases and obviously, the inherent complexities that that put into it. But on its core, the intent to percentage rent is a sharing relationship, where you have a variable amount of rent that is tied to the performance of the store.

Quite simply, as sales go up, obviously, the landlord is able to share in that profitability. And so, the message is pretty clear of what percentage rent does for both parties. But I think historically, we saw reluctance by some retailers to enter into percentage rent leases. It either be that it is administratively burdensome or we even have some retailers that really just don’t want to share sales with their landlords. They don’t want to know what sales are flowing through. Or they just don’t want to share in that because of the nature of their business.

But now I feel like tides are shifting again. I think there’s pros and cons to this. But clearly, from a tenant’s perspective, if you had more tie to sales and clearly, we had a pandemic that shuttered stores, obviously, your expenses go in line with that. So I guess, Kim, perhaps starting with you, how does GNC see percentage rent? And what’s your strategy there, and has it changed at all?

Kim:

Sure. I mean, pre-pandemic, GNC had percentage rent language in all of their leases. As you said, sales for a while, we shared that with the landlord. Our strategy is a little bit different post-pandemic. We’ve been negotiating straighter percent of sales rent for our stores, but it looks a little bit different than I’ve seen in the past, like when we would exercise a co-tenancy provision and it was to switch into a straight percent of sales. Now, they’re structured on a term basis. So the better we do, the higher percentage that the landlord gets. So it’s all tied to our sales. But just the better we do, the more they get. And I think that helps us as well if the center isn’t performing as well traffic sound or our stores not performing as well, our rent isn’t as high either.

Rick:

Got it. So it sounds like there’s potentially more upside for the landlords with those tier breakpoints from presuming the percentage of payment obviously increases as the tiers increase commonly, so that’s something that hopefully they’re appreciative of that upside. And it also minimizes risk, because as you mentioned, if they don’t perform well or the center is not performing well in general, those have a net impact on a reduction in cost. Alyssa, what does this look like from Lush’s perspective?

Alyssa:

I’ve always given a lot of percentage rent to landlords. And so, through ’17, ’18, ’19, when we were doing some pretty high sales, it was really lucrative for landlords to have that structure. At this point, it’s really great for us to have had that structure because we can go back to the base minimum rent structure that we were at. And it really does help us to maintain that occupancy level to match the sales that we have. Landlords had always wanted to true up that rent to what we are paying in percentage rent when you’re looking at our renegotiation or something like that.

But I’ve always avoided that conversation with landlords and held off on agreeing to that language. Happy to pay percentage rent when we’re doing great and have them participate in that win. So for now, it’s been great.

Rick:

Makes complete sense. I guess a little bit from the accounting side, Kim, and I realize you have other team members that support some of the accounting functions. But with percentage rent goes accruing for percentage rent, so this anticipation of how much am I going to pay. And perhaps, this is just what COVID has brought. It seems like some uncertainty with what sales look like, so there’s making some best guesses around sales forecasting, see how those play out. Do you feel like things have stabilized and you’re getting to a better understanding of forecasting sales and thus, forecasting your percentage rent expenses?

Kim:

No. I think things have definitely smoothed out. I mean, as the country is starting to open back up, I think they’re getting our feet under a little price, a little more in terms of what those sales trends look like. I know we’re going to touch on this later, but where we’re seeing a bit of variability is not omnichannel sales, which are still a little bit unpredictable for us. And I think sometimes there are some surprises in a good way where we see some higher accrued percentage rent, just because we’ve done more online. And so, that’s what’s still a little bit more challenging for us to forecast what that’s going to look like.

Rick:

And I think we’ll touch on that topic a little bit more, because I think where the sale is coming from, so to speak, is definitely a hot topic. And there’s some very strong opinions on that one as well. I guess let’s talk about some other areas around the lease. And I think I feel like companies spent months, years, thousands of hours abstracting terms or negotiating terms. And then when something really happens, where you need to go back to the lease and hopefully get relief, you appreciate what did I do well and what didn’t I do well in terms of what was negotiated.

Because I don’t think any of us could have anticipated this nor decided what would have been appropriate 10, 20 years ago, that now is something that’s manifesting now. But I do feel that it’s likely that retailers are rethinking, what aren’t we negotiating leases? What is worth everything that’s negotiating the lease in theory has cost to it? So if we’re going to ask for certain provisions, those provisions have cost. In some form or fashion, you’re going to negotiate those provisions. And maybe you have to pay more in rent in order to get provisions that you want.

So everything is a negotiation around us. And I think some of the items that certainly COVID has created, I guess, one of those is around cleaning. I mean, cleaning, sanitization. Is this something that we started the pandemic and this was the most important thing and this was a way to build consumer and customer confidence and how people are going to be kept safe. Alyssa, anything here from a perspective of cleaning? Was this something that you felt you had you’ve been satisfied with what’s occurred with your landlords in your leases have provide? And is this anything that you’ve changed in strategy at all?

Alyssa:

I mean, for us, as a business, we sell soap. So we were probably okay on cleaning our shops. But the landlord’s piece and them upholding cleaning the properties, that’s been an issue for sure. We were seeing lots of restrooms and common areas that haven’t been nearly as taken care of. And that’s really around having the labor and the help to do so. So they’ve reduced their workforce teams, just as most of us have done as well. So that’s been a bit of a challenge. So I would say, for sure, there are provisions there. Do you want me to launch into a couple other provisions aside from cleaning?

Rick:

How about you hold that for a minute and maybe we’ll come back to some of those others. But, Kim, any thoughts on the cleaning before we move on?

Kim:

I think, no. I’m going to just echo what Alyssa said, we’re seeing pretty much the same thing. And our space is pretty small. So just some of the normal cleaning that countertops and surfaces like that will continue to maintain.

Rick:

Let’s talk about a couple other items. So one is around operations, hours of operation. And I think we’re probably all dealing with this now because as we’re all aware, we had this massive dip in employment, and then it’s come back. And now, there are staffing issues. There’s either just the inability to find people to fill roles or that perhaps maybe they don’t want the roles where they’re in front of customers and feel at risk. So I think this is not just retail.

I mean, I think every business is dealing with this and in restaurant where you’re walking in a restaurant and a half of it is closed off because they can’t staff servers to operate the restaurant, I’m presuming this is an issue for retail as well. Because what some may not recognize is, obviously, the landlords want you to be open for a fixed set of hours, and those hours are something that’s negotiated and potentially defaultable if you don’t adhere to that. And then you could be in a position that you can’t staff for those hours. Or you have a pandemic that forces them to close the doors. I guess, Kim, if you can speak to this, is this something that is a current issue? Is hours operation something that your landlords are concerned about, and you guys are as well?

Kim:

Definitely. As you had said, we’re having trouble hiring people and staffing the store, so that definitely becomes an issue, maintaining the minimum, the hour coverage that’s in our leases, so something that we’re definitely addressing with lease renewals as we move forward. And a lot of our stores are run on one person coverage. So there really is a big impact when we can’t find someone to staff the store.

Rick:

Makes sense. Alyssa, same with you guys?

Alyssa:

Same. We are starting to get trickles of defaults here and there where the shops not maintaining full hours till 9:00 p.m. or something to that degree. But it’s a matter of shortage of team members operations. They’re just stretched too thin to be able to maintain the hours as required in the lease. So we’ll change that. Never had I imagine that that would be something that we would have to change in a lease. But moving forward, we’ll have to figure out a way to take that out.

Rick:

Well, good. Yeah, that’s helpful. I mean, I think, again, these are things that, as you mentioned, you wouldn’t have thought about 5, 10 years ago that this would ever be problematic. You’d have trouble filling roles for a variety of purposes. So interesting to note. Let’s talk a little bit about pick up, curbside, buy online, pick up in-store, all kinds of different acronyms for this. But I think this is something that I feel, really, the industry was forced to jump forward.

Some people have set on the magnitude of 10 years in evolving this concept to really what was capable when people put their minds and efforts towards it. And the nature of that, really obviously, started out of necessity because the stores are closed or couldn’t have customers in the store, but you could still sell and distribute out of the store. And so, we are getting into everything from how do we deal with parking and curbside pick up and how do we allow pick up in general, how do we have ways to reconfigure stores even temporarily to deal with us.

But I think one of the real interesting issues around this is, where are those sales associated with? Because are those online sales, are those in store sales? This is absolutely something that already the mall owners have made it pretty clear that they feel that the stores that “can be associated” with the store should be from a perspective of percentage trend reporting and obviously, expense associated with that. So, Alyssa, what’s going on in this world relative to this structure?

Alyssa:

Yeah. So you hit it, the fact that this was not something that we were really fully prepared to go into. We launched our BOPUS program in holiday of ’19. So it was really quite fresh and new. And we were just getting through the kinks of it all. We actually did shut down shops entirely. So product did sit in shops for about a month-and-a-half, two months before we were able to send staff back in, and then go ahead from there. We started doing different phases of operation, and BOPUS became a big one, big part of that tier one and tier two operations.

And so, for our team, we’re allowing the sales to run through our shop terminals. So shop managers and the malls are getting credit for those sales that are happening through that location. Whether that’s long term or not, we don’t know yet. It’s where we’re at today with the technology that we have. So we’ll see if that’s something that continues to move forward or becomes a digital sale and it changes entirely different. We also are looking at same day deliveries. Those will come directly from the shops, not from manufacturing. So those sales will also be occurring through the shop terminals, and landlords will be getting credit for those and the shop managers as well.

Rick:

It sounds like at least for the foreseeable future, you’ll make some landlords happy in that regard.

Alyssa:

I won’t allow the landlords to capture that, that if into the terminal, then everyone sees that and it’s that sales report.

Rick:

I think your situation is probably like others that in the way that your point of sale has been built out and what capabilities it has, and this has been a challenge for many organizations, even pre-pandemic, just what their capabilities are to actually attach that sales to something other than a store. And so, Kim, what is this looking like in GNC’s world?

Kim:

Yeah. I think we had, early in 2020, started the rollout of our buy online, pick up in-store. So it’s definitely accelerated. In addition to that, we also have an auto deliver and save program. So if a customer comes in and signs up for auto delivery of their vitamins, they can potentially receive those, and this could be shipped out of the DC versus the stores. So anything, any traffic that’s generated in the store where they sign up for this auto deliver and save service or they order something that our store doesn’t have, the store gets credit for that sale.

So anything where we physically brought a customer into the store, we report those sales to our landlord. So that, obviously, makes them happy, where we probably need to do some deeper dive and some tweaking, is where we do our stores are the main distribution center and the orders come from is generated online, but shipped from the store. The position we took right now is those sales are excluded from what we’re reporting. But obviously, as we’re negotiating new leases, that’s definitely a topic that we’re addressing in terms of updating that sales provision and what that looks like, was included and excluded from our reportable sales to the landlord.

Rick:

Understood. And so, it sounds like both of you are taking a pretty, pretty flexible approach to this topic and working pretty fairly well. Let’s move topics a bit. And let’s talk about security, safety. And unfortunately, there’s been plenty of tragedies. And I’d love to say it’ll never happen again. But unfortunately, these tragedies are happening with some degree of regularity. And obviously, some of this is the gun violence. But now, as you can see, there’s this unfortunate newfound assaults of people that are occurring in the most unexpected places.

And you’re seeing this again if it’s in retail centers, if it’s on airplanes. And I certainly appreciate your roles are to ensure the customer is safe, but how about the employees as well? And this could be something that’s contributing to some of the anxiety and concern that even staffing may impact your staffing. Alyssa, is this a big deal issue for you guys? And is this something that you’re taking any preventative steps in this regard?

Alyssa:

Yeah, absolutely. So this, unfortunately, has moved front and center for me in terms of leases and relationships with our landlord. So not only were we dealing with the safety of staff and customers from illness of COVID, but as we started reopening shops, we quickly shut a lot of them back down during riots. We were preparing shops with plywood and things like that, just to keep them from getting demolished. Some work, some didn’t. And then right after that, we were dealing with multiple shootings and threats and things like that and staff safety.

So in a lot of our locations, the staff was looking to the mall security to help them, to help them stay safe. And really, that partnership has been typically great. But again, with the reduction of folks on the landlord side, of course, they were trying to reduce their cost as well. We just, really, were not helping that support that we needed. So I’ve gone in and put in different safety measures in the shops to protect the staff. And looking at how we operate a business and keep our staff and our customers safe is become front and center for me on a property base, so having backrooms, having safety ability for the locks, backdoors to lock.

I mean, we used to have barn doors and things like that for backdoors. That’s no longer acceptable for them to be secure. So it’s just definitely moved to the forefront of my work and what I’m looking at to be effective.

Rick:

Yeah, unfortunate evolution, I guess, in that regard. But, Kim, I know you guys probably share some of the same common center as Lush. And you also have some unique center types that you participate in that are different as well. So, are you guys seeing a lot of emphasis around safety and security as well?

Kim:

Yeah. I mean, I think just similarly to what Alyssa said, it’s something that we’re definitely looking at and trying to make sure that our associates and customers that are coming in, it feels safe in our stores.

Rick:

Yeah. I think, pretty much, that’s all that everyone’s expecting. It sounds like, Alyssa, you making some material changes to some of the furnishings to enable some additional security measures. But really, this is a cooperation with the landlords and management companies and the security that they staff. So ultimately, hopefully, these are not things we have to deal with, or at minimum, not deal with as frequently. It’s unfortunate, we’re even talking about this topic, but it is what it is. And we have to recognize it and address it. So, I wanted to shift our gears a bit.

So we talked a little bit about what are some of the terms, I would say lease causes that maybe would have been impacted with things like co-tenancy and percent rent and security and cleaning whatnot. But I think there’s also, for many businesses, a rethinking of what should at least look like. I think both of you operate businesses where there is a natural appreciation for a good center is important to the success of your business. And you, obviously, always want to get into the best centers that you can get into and that you can afford and that fit within your customer profile.

And I think the old way of this would be you’d make investments in the space, and so you’d have some capital costs upfront, and you want to make sure that you’re putting together a lease that has enough lengthen the lease. So you’re able to have a return, obviously, on your investment because you have some upfront capital cost. Everything doesn’t get addressed through a tenant improvement. I’m presuming to get your space built out to the degree. I mean, certainly, everybody likes those improvements if you can get them.

But I think it’s quite pretty common that they don’t fully cover those costs. So as you model out when a store becomes profitable and what that looks like, certainly, you want to do it in a way that once you get to that point, you have some term left on your lease and you’re able to obviously stay in that center for some predefined period of time and have somewhat known expenses. But I feel like the past year or so has really altered thinking, and perhaps you guys can give me a little insight to this.

And I think the first topic around this that I would be interested in hearing about is the term of the lease. So even if we don’t talk about any type of cancellation or termination yet, but if we just talk about the length of the lease, the duration of the lease in years, and renewal options. I guess, Kim, starting with you, has this changed? Is this different for GNC what it was years back from what it is now?

Kim:

Absolutely. I mean, right now, we’re looking at renewing for shorter terms, maybe one to two years. I think there are several reasons for that. We’re still evaluating the stores that we’ve kept open to see the impact of the closed stores. So are we really seeing a pick up where we over cannibalize in markets, and how is that impacting the sales at the stores that are left? So we’re leaving ourselves some flexibility there. And also, to see what the landlords are doing to some of the centers, whether there were vacancies or they’re looking to redevelop things. So we’re keeping our terms as a store at length so we can see what’s happening there. Or if there’s an opportunity for us to relocate to a better center or more desirable center that we’re trying keep our options open for that. That’s our strategy right now.

Rick:

So shorter initial term sounds like, and then relative to the renewals, is that changing? Do you have as much dependency on renewals and/or the length of renewals and/or what those renewals would look like?

Kim:

You know what, right now, in some of the leases that we are renewing in a shorter term, unfortunately, there aren’t options that we can exercise. We have seen in some of the stores that we want to renew where we do have an option left, that the option rent is actually more favorable than if we wanted to negotiate a shorter term deal. So again, now I think we’re in a position where we just want to see how some of the stores do post-bankruptcy and post-pandemic.

Rick:

So for you guys, you have your online strategy of, as you mentioned, your subscription strategy of your pick up in the store or just obviously your brick and mortar strategy. Alyssa, what does this look like for Lush? I mean, I know you guys are in some pretty nice centers, have been to many of your shops as well. Can’t be cheap to operate in those centers. But hopefully, the traffic is in the customer profile is what you’re looking for. Has this change at all for you guys in terms of length of term, renewals, any strategy?

Alyssa:

Yeah, a couple things. One is length of term. So if I have a shop that’s coming up for renewal right now or in then next 12 months, I would do something like a two to three-year renewal on it at this point. And overall, I think what we’ve seen in coming back, and every shop is different, but what we’re seeing is that these major metropolitan areas are slower to come back. These are where offices have been closed and downtown set sectors. So those are the ones that are having a harder time coming back in terms of retail sales and traffic.

So that will change, I’m sure, over the next 12 to 24 months. But those are the ones that are more on my watch list at the moment, harder to operate, because the rents were so high. And I think, currently, I’m in the middle of an entire analysis with Tango doing a full across the board market survey. So my team has also done that on every shelf that we have. So we’re looking at the space and the condition, the term, and then we’re going to layer all these things together to make sure that we’re covering the markets appropriately, and that we do negotiate the right extension of term or relocations or things like that. So trying to get a really broad picture of what we’re looking at versus just looking at it under a microscope.

Rick:

And again, you guys have been traditionally in these centers, fixed stores, obviously, the online presence. Anything new in terms of how you’re selling–not necessarily new concepts, but new structures to how you sell?

Alyssa:

Yeah, I think that we’re looking at different things. Our partners in Europe have done subscription boxes. Those will be separate from the retail shops and probably run more through the digital footprint. And there’s lots and lots of other opportunities that we’re looking at. So partnership with other brands, we’ve done that as well in Europe for the first time. So we will probably continue to try to evolve and pop up in these new spaces. And technology is just continuing to evolve. And you’ll be participating in that. So where the customers are and where there’s purchasing and wanting to see products, then we want to be there with them.

Rick:

Very good. So also, in the context of the lease construct, so I think depending upon where you are positioned before, I think many organizations started opening their leases in March, April last year and started paging through to see, hey, do I have a termination? Do I have a sales kick out? Do I have this? Do I have that? And so, not for many companies, not an ideal time to start figuring out what rights you have to get out of a lease.

And I think with us all living through this having the flexibility to get out of the lease is certainly something, I’m sure, that clearly comes at a price, but a price that may be worth it to you. So if we talk about the ability to terminate a lease, either with some type of termination option, even with a penalty, or a sales kick out if sales don’t meet a threshold. Alyssa, is this something that I guess you’ve had in your leases all along? Is anything changing here, more important, less important, staying the same in regards to these type of terms?

Alyssa:

Well, I’ve always structured the leases that I negotiate with kick outs, and those are all based upon sales. I think that moving forward, we may look at different ways that a kick out may have to come into play, if it’s not even just for sales, if it’s for occupancy purposes, things like that. We’ve always had co-tenancy based upon the main property and then anchor co-tenancy and things like that. Those all gave us an opportunity to kick out if we were seeing a drop. So I think that that will continue to evolve. And I’ve heard of other retailers, but I’ve never done it where you’ve had multiple kick outs throughout a lease term. So having that option more than once would be helpful.

Rick:

And Kim, how about on your side with this?

Kim:

I mean, yes, all of our leases did have co-tenancy provisions, kick out provisions in them. Where we’re renewing a lease for longer term like three, five years, we’re definitely including a kick out clause in that. Some of the shorter term leases, it’s not as easy important for us just because the fact that our lease length isn’t that long. But definitely, any new leases that we will be doing or a lease where we need to do a three to five year extension, we’re definitely including kick out language in that.

Rick:

I think that flexibility, while it may come into price, it may be a price worth paying for. Hopefully, we won’t be back here with a similar type of event in the future. I think we’ve all learned quite a bit from what can and can’t be done. And I think in typical American fashion, people got pretty creative through this process to try to keep things moving forward, keep the lights on, keep the stores open. If we all went through this again, I’m sure there would be some different approaches that everyone would apply to this.

So hopefully, we won’t have to find out about that, but I think that flexibility is definitely something that companies like yourselves definitely are interested in. So I guess, the last topic related to the term is more of the financials. And again, just looking for some broad brush here, I appreciate, we’re not talking specifics for you guys. But there’s a couple things that I would be interested in getting some insights into. One is, well, we already talked about percentage rent.

So that’s how landlords are sharing in your performance positively or have some additional upside when you outperform expectations. The other element of this is net rent or ghost rents. And for the people on the line that may not have that kind of background, retail leases, commonly are net leases in many instances where you’re paying some base or minimum rent. Or even, that could be a percent of sales scenario, as Kim mentioned, in some of their leases.

But that net rent often includes things like common area maintenance, real estate taxes and insurance as add-ons that are often paid as a pro rata share to how much space you occupy. And those costs, as we’ve all experienced, some of which increase pretty substantially with things like real estate taxes, where many states, including the one I live in, have a very high property tax base. And it just keeps getting higher because there’s so much of a dependency around property taxes as revenue source. Clearly, taxes is something the landlords can’t control.

So it’s not something they’re very open to applying caps in those areas. And so, you’re put into this position that some operating expenses, you can negotiate capped amounts, so you can have some predictability to it. Some, you can’t. But let’s say, if I started with you, gross rent, net rent, what are your leases, what do you think is the best fit for you guys, and the approach that you’ve taken.

Alyssa:

So to your point, like in Illinois, where the taxes are higher, I always look at that stuff ahead of time as we’re doing the deals. So I know what my average over the term looks like. And they’re estimated, of course. But I always make sure that we’ve kept that and make sure that the variability is measured, and we know where we’re going to go with that. The CAM piece is a little different, of course, where you’re taking pro rata share for the property. And if that does substantially change and the center is less occupied, then that changes quite a bit.

But we do also have caps in there for those as well. So it can only increase by a certain percent every year. So we’ve I’ve taken out some of the risk, I would say to some of those pieces. When I look at a deal, I look at the whole net piece of it. I want to know what my year one is. I want to know what my year 5 average is going to look like and your 10, so that I know, can I afford this deal over the term that I’m looking to sign up for.

Rick:

Right, makes sense. Kim, what a run structures look like for GNC?

Kim:

Sure. We’re negotiating more gross rents to reduce some of the variability of the true-ups at the end of the year. So we’re going and note for an all-in deal that includes CAM tax as an insurance. Where our landlord is willing to agree to the gross rent, we do have caps on most of our lease for CAM, real estate taxes lamp. I’m generally not seeing cap on those. And the one thing that landlords typically exclude from any cap, CAM cap are some of their uncontrollable expenses, perhaps no removal or utilities, things like that, that they can’t really predict. So that’s what we’re seeing.

Rick:

Got you. So I mean, I think, again, it sounds like you’re putting predictability first so that you get a good picture. But it goes back to the same point Alyssa made, which is if you’re looking at in terms of what this is going to be all in, you’re understanding, in essence, your budget, what you can afford, and understand your profitability to the best degree that you can. So we have a couple minutes left. I just maybe wanted to open it up. And, Kim, if you have any closing thoughts? I don’t see any questions in the chat at the moment. But do you have any closing thoughts, Kim, in terms of anything else that you’d like to share with us here this afternoon?

Kim:

I think we’ve touched on a lot of what we’ve been seeing, obviously, some of the stuff that we experienced during COVID. It was pretty hard from an accounting perspective to track and manage and report on all of that. Hopefully, we don’t see anything like that going forward. So some of the things we saw made it pretty interesting and creative, but I’m hoping all that’s behind us for right now.

Rick:

Sounds good. And it’s interesting, because I think, ironically, both of you, I spend quite a bit of time with last year on a lot of challenges. You are dealing with rent abatements and whatnot. So we learned a lot. We realized what was easy, what was hard, and in the end, got to where we needed to get to. But as all retailers, I’m sure, are aware, was definitely not an easy path. And I’m not convinced we’re all the way back there. Hopefully, things are going to continue in the right way. But with that, Alyssa, any closing thoughts or any anything else we want to touch on?

Alyssa:

No, I think you touched on most everything that we’re thinking of. I mean, we’re dipping our toe back in the water and going back and doing some pop ups and some things to test markets and try to go back into retail spaces again. And so, that’s exciting. But from a long term standpoint, we’re not really fully there yet to want to commit to these shops. And yeah, so I think that the Tango system was great for us. Unfortunately, we got caught with not being able to pay rents for a little bit and having to make quite a lot of adjustments. So appreciate all your hard work.

Rick:

Yeah. Hopefully, collectively, we both won’t have to deal with that through another round.

Alyssa:

But it is nice–it’s transparent, right? So we can run reports. You’ve got all the information now.

Rick:

Yeah. We’ll let all those accountants figuring out where all the dust settled on the backend of this. But I want to say in closing, I really appreciate you both sharing your thoughts around some of the trends and strategies around what’s going on in the lease world. I think it feels like we went through 10 years and a year. And now things are getting back to some normalcy. And hopefully, we can take the positive of what we were able to do and the resilience that people were able to bring to the table and take all of those learnings and deal with that in addition to the things that were challenging for all of us, and be able to move forward in a better way. So hopefully, the expertise you guys shared here this afternoon are things that people can have some takeaways and learnings from and we really appreciate your contributions.

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