Here’s why observers say Simon Property Group is bailing out bankrupt retail chains

In mid-August, Simon Property Group in a joint venture agreed to buy Brooks Brothers and Lucky Brand Jeans out of bankruptcy for $325 million and $140.1 million, respectively. 

According to market speculation and other reports, Simon Property Group and rival mall owner Brookfield Property Partners could partner to buy J.C. Penney, which also has filed Chapter 11 bankruptcy.

This isn’t a new strategy. Before the largest owner and manager of U.S. malls was facing the global pandemic, it was contending with the so-called retail apocalypse.

“I think they finally figured out that they know the difference and maybe they should start getting in the game of helping innovative, good retailers to succeed through capital and expertise,” said John S. Talbott, director of the Center for Education and Research in Retailing at Indiana University’s Kelley School of Business.

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Simon Property Group did not respond to requests for an interview for this story. But retail experts such as Talbott and others interviewed by the IndyStar, part of the USA TODAY Network, say the recent purchases reflect an ongoing change that seizes upon opportunity. Leverage your insight. Bargain shop for quality brands. Consolidate stores. Embrace e-commerce. 

Pedestrians wearing protective masks walk past a Brooks Brothers location in a July 8, 2020 file photo, in New York.

Industry watchers say Simon Property Group is building on its shared acquisition of teen apparel chain Aéropostale. Still, a misstep could prove costly.

President and CEO David Simon provided analysts some insight into the company’s strategy during its second quarter earnings call on Aug. 10. 

“There’s been a lot of bankruptcy this year. We’re not playing in a lot of them,” said Simon, who declined to address speculation about whether the company is pursuing J.C. Penney. “We’re very selective in what we’re looking at. The brand’s got to have value.

From retail landlord to savior

Talbott likens Simon’s growing sideline of retail ownership to moving up a food chain.

“It’s kind of like when suppliers decide that they want to go directly to consumers, and you know, as you go upward in the food chain, the margins get better,” he said. 

Simon Property Group has become adept to evolving its business model, Talbot said. The company’s longevity, expertise and internal data provide insight into which brands might be good to salvage. 

In 2016, the Indianapolis-based company and a consortium of investors that included New York-based licensing firm Authentic Brands Group and mall owner General Growth Properties, now owned by Brookfield Property Partners, finalized the $243.3 million purchase of teen apparel chain Aéropostale. 

Similar to the situation with Brooks Brothers, Simon Property Group and the investor group bought the brand out of bankruptcy, which helped the chain avoid a total liquidation. 

In February, Simon Property Group, ABG and Brookfield finalized the acquisition of fast fashion retailer Forever 21. ABG and Simon Property Group each took a 37.5% ownership stake while Brookfield Property Partners now owns 25% of the intellectual property and operating businesses. 

While the retail apocalypse may be the prevailing narrative among observers, Talbott said it’s not one he agrees with. Consumers have directed their shopping habits online, leaving companies to rightsize by closing brick and mortar stores. 

The pandemic has exacerbated that shift as shoppers, unable or afraid to physically go to stores, increased online purchases. 

“Retail is a huge industry that’s going to be around, and out of the other side of this is going to come more innovation than you’ve ever seen before, and Simon is buying when others are selling,” Talbott said. 

“If you can get the J. Crew brand — a brand that probably five or 10 years ago was worth multiple billions of dollars — if you can buy it for $500 million today, it’s a deal.”

J. Crew filed for bankruptcy in May. 

The pluses and minuses of chain ownership

In the Aug. 10 earnings call, CEO David Simon insisted the company isn’t seeking to have a large portfolio of retail brands but instead is keeping an eye out for selective opportunities. 

He has said that the company has made a lot of money on “value-creating opportunities” such as the Aéropostale deal.

The company, he said, will continue to look for and capitalize on similar deals.  

Under a partnership called SPARC Group LLC, Simon and ABG is purchasing the brands Brooks Brothers and Lucky Brand Jeans out of bankruptcy at or below cost, David Simon said.

The company is buying tenants in its own malls, but Simon dismissed claims that his company was seeking the retailers to ensure rent payments. 

“We’re doing it because we believe in the brand,” Simon told analysts. “If we didn’t believe in the brand and if we didn’t think we could make money, we wouldn’t do it.”

As he explained to analysts, SPARC absorbs retailers at reduced overhead costs and can reject any retail lease that doesn’t fit and is deemed unprofitable. 

Simon said SPARC is seeking investments that quickly return a profit. 

Talbott notes that even though Simon Property Group is buying distressed chains, the retailers still have brand value to consumers and are sustainable. 

Simon Property Group could end up with a smaller, more profitable business by closing underperforming stores, letting go of some brick and mortar employees and working to fine-tune the brand’s e-commerce business.

“What they’re doing when they acquire these firms out of bankruptcy, the locations that are not Simon malls will be closed …,” Talbott said. “So they’re gonna go in and anywhere it doesn’t make sense to keep that door open in some of their malls, they won’t keep it open.”

Aéropostale, for instance, had more than roughly nearly about 800 stores when it filed for bankruptcy in 2016. The retailer now operates more than 500 stores in the U.S., according to Simon Property Group. 

While Talbott said the company seems to be employing a smart strategy to evolve its business, there are a lot of risks.

SPARC could bet on the wrong retailer by picking a brand with a disrupted supply chain or declining brand value for consumers. Stock ratings agencies, such as Standard & Poor’s view, revised their outlook on Simon Property Group to negative due to the possible long-term implications of the pandemic on the company’s retail tenants. But, David Simon said he is unconcerned about that outlook and how they view the recent transactions. 

He sees a profit on a low-cost investment. 

“Those two investments, either directly or through capital contribution to SPARC, will be under $50 million from us,” Simon told analysts.

What does this mean for the future of Simon?

Scott Stuart, CEO of the Chicago-based Turnaround Management Association, an organization that represents professionals who works in corporate restructuring and renewal, said Simon is acting similarly to a private equity firm. 

Even during the pandemic, the company is flush with cash. It reported $8.5 billion in liquidity at the end of the second quarter, including $3.6 billion in cash. 

“One of the avenues that they’ve chosen to pursue is doing equity participation and, in some cases, acquisition of retailers in an effort to both shore them up and maintain the integrity of their retail spaces beyond the anchor stores,” he said. 

This, Stuart said, is just part of the process of rethinking Simon Property Group’s business model as retailers consolidate and face pressure from online giants like Amazon.com. 

And unlike in the past, retailers aren’t lined up to fill empty mall suites. 

“Their back is up against the wall. There aren’t retailers lined up to jump into a spot that a Forever 21 or a J.C. Penney or Sears has vacated,” he said. “So if they don’t rethink what they’re going to do to survive, they’re going to be left in a very vulnerable position.”

The Wall Street Journal, citing people with knowledge of the matter, reported earlier this month that Simon and Amazon were engaged in talks to convert empty J.C. Penney and Sears department stores into fulfillment centers

Talbott said Simon is uniquely qualified to bailout chains because of its scale, balance sheet, and experience. The company isn’t the same as it was two decades ago, when the focus was optimizing rent structures and keeping shopping centers full. 

“They probably wouldn’t have given a lot of thought to this notion of nurturing new retailers — early-stage retailers — and also picking off brands that have suffered from these difficult economic times and that are still valuable,” he said. 

Contact IndyStar reporter Alexandria Burris at [email protected] or call 317-617-2690. Follow her on Twitter: @allyburris.

This article originally appeared on Indianapolis Star: Simon Property Group: Why mall owner is bailing out retail chains