Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU) is the latest retail landlord making a move to help offset the effect of the worsening retail apocalypse. While the global property giant has yet to cut its dividend, it has now joined mall-owning peers like Simon Property (NYSE: SPG) in laying off staff. That move will better align its workforce with the future scale of their portfolio, according to an email obtained by CNBC from the group's retail CEO Jared Chupaila.
It's a sign that the company sees a tougher road ahead for the retail sector, which suffered a huge blow this year as COVID-19 accelerated the shift toward e-commerce. However, it doesn't mean the company sees no future for physical retail, which is clear by some of its other moves this year.
Realigning with the new reality
Brookfield Property plans to downsize its retail-focused workforce by about 20%, according to a report by CNBC. The reductions would occur at its corporate headquarters and its leasing offices.
The company had held out longer than many of its retail-focused peers in reducing its workforce. For example, Simon furloughed 30% of its workforce in March when it shut all its U.S. malls. It also permanently laid off some of its staff, temporarily reduced some of its employees' base salaries by 10% to 30%, and cut CEO David Simon's salary to zero while deferring his 2019 bonus until market conditions improved.
Brookfield, on the other hand, made the conscious decision to keep all their team employed while they gained a better understanding of its longer-term impact on their company, according to the email from Chupaila. However, during that time, the company realized that a staffing realignment is necessary, given what it sees ahead for the retail sector. With the pandemic not only affecting retailers but also dining and entertainment companies, the company's properties likely face a long road ahead as they try to fill an increase in vacant space. As such, it won't need as many leasing agents nor corporate personnel to oversee redevelopment projects aimed at turning more of its malls into mixed-use live, work, stay, and play properties.
Still betting on retail's future
While Brookfield expects more challenges ahead for retailers in the near-term, it also sees opportunities. Earlier this year, the company's parent, Brookfield Asset Management (NYSE: BAM), and some partners launched a $5 billion Retail Revitalization Program to help recapitalize retail businesses in major markets. Through the program, Brookfield would make non-control investments in retailers, giving them the funding to reduce debt and other financial burdens so they don't need to reorganize in bankruptcy. That program would strengthen its tenants so they can continue paying rent to its mall properties.
Meanwhile, Brookfield Property recently partnered with Simon on a bid to rescue bankrupt retailer J.C. Penney (OTC:JCPNQ). The $800 million deal would enable the retailer to keep 650 stores open and preserve 70,000 retail jobs. It would also prevent other tenants from exercising co-tenancy clauses that would allow them to renegotiate their lease or vacate their space if an anchor tenant like J.C. Penney closed its doors. Similarly, the acquisition would give Brookfield and Simon more control over J.C. Penney's real estate, which they could repurpose in the future if they did close stores.
Simon and Brookfield have had some success with their strategy to buy bankrupt retailers as they turned around Aeropostale with the help of apparel licensing company Authentic Brands Group. They're aiming to repeat that success with Forever 21 and now J.C. Penney.
A long road to recovery
Brick-and-mortar retailers were already struggling mightily before COVID-19 forced many to temporarily shut their doors, which left consumers with no choice but to do more of their shopping online. That acceleration in e-commerce will likely have a lasting effect on the industry, which is why Brookfield is trimming its staff to better align it with current market conditions. However, what's clear from its other moves is that the company still believes that physical retail has a future, which is why it's doing what it can to help more of its tenants survive so that they can thrive once the pandemic subsides.