Simon Property Group has bought two famous retail chains in the space of a week
Alistair Gray
© REUTERS
Simon Property Group became one of America’s largest shopping mall landlords under Mel and Herb Simon, brothers and co-founders. Under Mel’s son, David, it is also becoming a sizeable tenant.
Through a series of unconventional deals that show how an unfolding crisis in bricks and mortar retail is transforming old business models, the real estate company is helping to salvage big names in the US clothing sector.
A Delaware judge on Friday gave the green light to Simon to become part-owner of Brooks Brothers, the two centuries-old menswear retailer that was tipped into bankruptcy last month by the coronavirus pandemic.
Just days earlier, the property group — together with its BlackRock-controlled partner Authentic Brands, a licensing specialist that owns Sports Illustrated magazine — was given the go-ahead to buy Lucky Brand, the California-based jeans retailer, out of Chapter 11.
Setting out the rationale last week, David Simon, chairman and chief executive, said: “There’s just nothing out there that says you can’t make smart investments outside of your core businesses.”
But with the occupancy rate of Simon properties at its lowest level in a decade, the worry on Wall Street is that keeping retailers afloat with its own cash is a desperate attempt to prevent bigger areas of the malls from lying empty.
Simon has a low profile outside US property and retail, yet it played an influential role in developing the country’s urban geography through the late 20th century.
Started as Melvin Simon & Associates in Indianapolis in 1960, the company was central to a national building boom as families flocked to the suburbs. The Simons earned a reputation in real estate circles as “the Marx Brothers of Malls”.
Today the real estate investment trust is the country’s biggest mall owner, with a portfolio comprising large centres including King of Prussia in Pennsylvania, Sawgrass Mills in Florida and Del Amo Fashion Center in California.
Sought-after occupants such as Apple and Sephora have helped the malls attract affluent shoppers and allowed Simon to cope better than distressed peers with the rise of ecommerce, although Gap, Victoria’s Secret, Macy’s and other out-of-favour retail brands are also among its largest tenants.
The coronavirus crisis is threatening to have a lasting impact. Mr Simon said the 2008 financial meltdown “pales in comparison” to the pandemic.
While more than 90 per cent of Simon’s tenants have reopened from lockdown, footfall remains slower than usual and many remain unable or unwilling to pay rent.
Simon has collected only 73 per cent of July payments.
A wave of retail bankruptcies — including of some of Simon’s most important mall anchors and tenants, such as the department store chains JCPenney and Neiman Marcus — is adding to the pressure.
Chapter 11 allows retailers to easily get out of lease agreements.
The company cut its dividend for the second quarter by 38 per cent, suspended more than $1bn of development projects and temporarily reduced staff salaries by as much as 30 per cent.
Wall Street is sceptical about the prospect of a rebound: shares have dropped 53 per cent so far this year to leave them trading at the lowest level since 2009.
Against that backdrop, it is clear why Simon wants to avoid more gaps in its malls. Having secured the purchase of two national chains within the space of a week, Simon is estimated to part-own about 400 stores in its own properties, according to data compiled by Green Street Advisors before the pandemic.
Simon bought fast fashion purveyor Forever 21 out of bankruptcy earlier this year along with Authentic Brands and another large mall owner, Brookfield Property Partners. The company also has interests in sporty brand Nautica and youth outfitter Aéropostale.
Mr Simon said such deals allowed it to buy the retailers’ merchandise, brand value and other assets on the cheap, and the company expected to recoup quickly what it invested. “It’s a sideline business,” he added, noting that the sums the company was spending equated to a small proportion of its near-$21bn market capitalisation.
Yet old property hands are watching closely the implications both for Simon and its rivals, especially as it eyes yet more rescue bids. Vince Tibone, retail sector head at commercial property advisers Green Street, said there were questions about whether the unusual ownership structure put other landlords at a disadvantage.
In cases where the retailers have stores that are located close to each other, Simon may have an incentive to keep those in its own properties open but close others, thus hurting rivals’ footfall.
“If you’re preventing these retailers from liquidating, that helps the whole industry, but yes, there are competitive concerns about how you make store closure decisions,” Mr Tibone said.
Running clothing chains is also an altogether different business to managing the real estate and collecting the rent.
Even if it left day-to-day operations to partners or sector specialists, Mr Tibone added, some investors questioned whether it was wise for Simon itself to be owning retailers. “It’s justifiable, but it’s concerning to some investors that it’s outside their core business.”
Such gripes are dismissed by Mr Simon. Critics of the strategy were “probably the same people that told Amazon to stay in the book business”, he said. He also noted the economic benefits of salvaging businesses that would otherwise face liquidation, saying Simon was helping to save 4,000 jobs at Brooks Brothers.
Neil Saunders, managing director and retail analyst at GlobalData Retail, said: “These retailers and their management teams didn’t do a very good job. Why shouldn’t Simon and their partners do better? They also have a better chance of success than private equity, which has an absolutely abysmal track record in retail.”
Simon has signalled willingness to do more such deals and, according to a person familiar with the matter, it is in the running to acquire, along with Brookfield, the department store chain JCPenney out of bankruptcy.
JCPenney would be a bigger and “much more risky” proposition, Mr Saunders added. “It’s going to need a huge amount of investment to turn it round.”
“Give us just time to prove our thesis right,” Mr Simon said. “At the end of the day, if we screw up, we will have lost a de minimis amount of money.”
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