Will Dis-Chem treat all landlords equally?

Dis-Chem has caused some consternation among the country’s largest landlords given its decision to not pay April rents in full.

Business Times reported on Sunday that it has withheld rental payable (excluding contributions for rates and utilities) to property companies – including Resilient, Hyprop, and Liberty Two Degrees – despite continuing to trade as an essential service during the countrywide lockdown.

But the pharmaceutical retailer contends it has paid “a fair and significant portion of the base rental together with suggesting a turnover-based rental”.

Perceptions

CEO Ivan Saltzman says: “There is a perception in the market that if your business has elements of essential services it is business as usual. Non-essential goods contribute significantly to our normal turnover and essential goods are traditionally much lower profit items.

“A greater proportion of our essential goods are medicine sales which yield much lower profit margins and pricing remains restricted by the gazetted single exit price.”

While footfall has admittedly been lower, the group’s position is curious given that according to its own disclosure, essential goods comprise the bulk of its retail turnover. Dispensary, baby care, the majority of healthcare and nutrition, a not-insignificant portion of personal care and beauty, and a portion of ‘other’ would fall into government’s categorisation of “essential goods”.

Source: Dis-Chem Integrated Report 2019

However, valid questions have been raised about the rentals due for its major warehousing facilities. These four warehouses – in Midrand, Cape Town, Delmas and KwaZulu-Natal (New Germany) – are owned by a complicated structure of trusts and companies owned by a number of the group’s current executives, primarily founders Ivan and Lynette Saltzman.

Total rent paid for three of the four warehouses in the year to February 28, 2019 was R101 million. It does not appear to be paying rent for the Delmas warehouse. A further R31.9 million in rent was paid to related parties disclosed simply as “various property companies” in the group’s 2019 integrated report.

This new ownership structure differs from that disclosed in the company’s pre-listing statement published in 2016. At that time, the related party interests in the KZN warehouse (via Josneo) and then still to be completed Cape Town warehouse (via MDSD No. 3) were held through Dis-Chem Property Holdings.

Source: Dis-Chem Investor Day 2018

In response to detailed questions from Moneyweb regarding whether the group will pay full rent for its warehouse facilities, given the position it has taken on its stores, Saltzman said: “Dis-Chem Pharmacies is looking for relief on the non-essential part of the business. This applies to all space leased across the group and is a principle pertaining to all leases regardless of the nature of the lease.

“The timing of the payments are different but Dis-Chem wants to be treated in the same manner as all other providers of non-essential trade in instances where the non-essential element applies to any of its trade.”

The group would not disclose whether it has made payment of rent for the leases due to related parties. Given the reference to “timing of payments” in Saltzman’s response, it appears that while retail rental is paid upfront, warehouse rental is paid in arrears. The group would also not disclose whether it would be making rent payments to the related parties at month-end.

Moneyweb posed the following questions to Dis-Chem:

1. What percentage of floor space (the area let) of the warehouse assets to which Dis-Chem pays rent to related parties are used for the storage and distribution of non-essential items?
2. Are there any warehouse assets (to which Dis-Chem pays rent to related parties) which are only used for essential items?
3. Has Dis-Chem proposed what it deems a ‘fair’ rental to these companies who are related parties?
4. How has or will the group negotiate the rental due to related parties, given the nature of these transactions?
5. Has Dis-Chem proposed what it deems a ‘fair’ rental to any of its landlords?

All Saltzman would say was the following: “Dis-Chem Pharmacies has proposed a mechanism to all landlords as to what is fair and reasonable – this essentially is centred around what is deemed non-essential vs essential. It is weighted towards turnover as opposed to space, again a fairer reflection of essential vs non-essential goods.”

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