Can You Have Your Cake, And Eat It Too? The Cheesecake Factory Doesn’t Think So.

Maybe you can’t have your cake and eat it, after all, in the age of the coronavirus pandemic. 

The Cheesecake Factory [CAKE] has told its landlords it will not be sending in rent checks for the month of April, as its eateries remain closed off to the public to try to help halt the spread of COVID-19. 

Here is exactly what the national restaurant chain said in its 8K filing, earlier this week: 

“Given the impact of governmental regulations and landlord decisions to close properties, considering the nature of our rent obligations and as part of ongoing efforts to manage our financial position and further preserve financial flexibility, we are not planning to pay rent on our leases for the month of April 2020 at this time. We are in various stages of discussions with our landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of the COVID-19 related closure.” 

The company also has already furloughed roughly 41,000 hourly restaurant workers, it said. 

Across North America, Cheesecake Factory has 94 restaurants. It also has 26 Cheesecake Factory locations operating overseas, under licensing agreements. Many of these are in enclosed shopping malls. 

There are likely going to be a flood of similar memos to come from restaurant chains and retailers, following Cheesecake Factory’s lead. It only takes one big business to publicly set a precedent, before many will follow. A similar situation panned out this way when Apple and Nike said earlier this month they would be temporarily closing their stores in the U.S. because of the coronavirus. Within days, dozens of retailers followed suit. 

The irony of the situation is that Cheesecake Factory is often cited by landlords, such as U.S. mall owners, for being a favorite tenant. Having a Cheesecake Factory, a Nordstrom department store and an Apple location at one’s mall, for example, is seen as the perfect combo. 

Not surprisingly, the biggest U.S. mall owner, Simon Property Group [SPG], has the most exposure to the restaurant chain today. 

Cheesecake Factory has locations at 29 Simon malls, 7 at Macerich [MAC] centers, 3 at CBL [CBL] properties, 2 at PREIT [PEI] centers, 1 with Washington Prime Group [WPG], 1 with Brookfield Property [BPY], 1 with Seritage Growth [SRG], and 1 with Taubman Centers [TCO], according to an analysis by RBC Capital Markets and Costar Realty. 

While none of these mall owners have publicly responded to the ongoing dialogues around who is going to pay April rents, we would expect them to do so on upcoming earnings calls, if not sooner. 

Macerich on March 27 withdrew its 2020 outlook and said it recently borrowed $550 million from a revolving line of credit. It had already cut its dividend earlier in the month. 

CBL on March 25 also withdrew its full-year guidance. And it said it drew $280 million under its line of credit – which it said was “ substantially all of the remaining available balance on the line of credit.” 

Washington Prime Group CEO Lou Conforti said in a press release on March 27, when the REIT announced it would be withdrawing its 2020 guidance, that “next quarter is going to be a son of a gun.” 

We would suspect that these REITs are not happy with Cheesecake Factory’s decision to outright not pay April rents. While we do not know the exact wording of their contracts, we might anticipate litigation to come from this. 

It reminded us of the time, in 2017, when Simon won in a court case it brought against Starbucks. 

Starbucks was planning to close 77 of its Teavana stores across Simon’s properties. The coffee chain had previously announced in the summer of 2017 that it was planning to shutter all Teavana locations by the spring of 2018, as they were dragging down Starbucks’ overall financial performance. 

However, an Indiana judge (Simon is headquartered in Indiana) ended up ruling in Simon’s favor. The lease agreements Starbucks originally signed with Simon for the Teavana brand required the tenant to be “open and operating during normal business hours,” reports said at the time. 

While we are facing an entirely different, unprecedented situation with the coronavirus, we know these mall owners will have more to say. And will likely be taking their own actions. They are the hook for mortgage payments, too. 

I own shares in SPG and TCO.