America’s Largest Shopping Mall Owner Gets a New Tenant: Itself - OZY | A Modern Media Company

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Buckle up: The future of retail is unpredictable.

By Alistair Gray

Simon Property Group became one of America’s largest shopping mall landlords under Melvin and Herb Simon, brothers and co-founders. Under Melvin’s son, David, it is also becoming a sizable tenant.

Through a series of unconventional deals that illustrate how an unfolding crisis in brick-and-mortar retail is transforming old business models, the real estate company is helping salvage big names in the U.S. 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, Simon Property Group’s chairman and CEO, 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 remaining unoccupied.

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Simon has a low profile outside U.S. 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 centers, including King of Prussia in Pennsylvania, Sawgrass Mills in Florida and Del Amo Fashion Center in California.

Probably the same people that told Amazon to stay in the book business.

David Simon, on his critics

Sought-after occupants such as Apple and Sephora have helped the malls attract affluent shoppers and allowed Simon to cope better than its distressed peers with the rise of e-commerce, although the Gap, Victoria’s Secret, Macy’s and other out-of-favor retail brands are also among its largest tenants.

The coronavirus crisis is threatening to have a lasting impact. Simon says the 2008 financial meltdown “pales in comparison” to the pandemic.

While more than 90 percent of Simon’s tenants have reopened, foot traffic remains slower than usual and many remain unable or unwilling to pay rent. Simon has collected only 73 percent of July payments.

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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 percent, suspended more than $1 billion of development projects and temporarily reduced staff salaries by as much as 30 percent.

Wall Street is skeptical about the prospect of a rebound: Shares have dropped 53 percent so far this year to leave them trading at the lowest level since 2009.

Against that backdrop, it’s 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 approximately 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.

David Simon says such deals allowed his company to buy the retailers’ merchandise, brand value and other assets on the cheap, and the company expected to quickly recoup what it invested. “It’s a sideline business,” he adds, noting that the sums the company was spending equated to a small proportion of its near-$21 billion market capitalization.

Yet old property hands are closely watching the implications both for Simon and its rivals, especially as it eyes yet more rescue bids. Vince Tibone, retail sector head at Green Street, says there are 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’ foot traffic.

“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,” Tibone says.

Operating clothing chains is also an altogether different business from managing the real estate and collecting the rent.

Even if it left day-to-day operations to partners or sector specialists, Tibone adds, some investors have questioned whether it’s 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,” Tibone explains.

Such gripes are dismissed by David Simon. Critics of the strategy were “probably the same people that told Amazon to stay in the book business,” he says. He also notes the economic benefits of salvaging businesses that would otherwise face liquidation, saying Simon was helping save 4,000 jobs at Brooks Brothers.

Neil Saunders, managing director and retail analyst at GlobalData Retail, says: “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 signaled willingness to do more such deals and, according to a person familiar with the matter, it is in the running to acquire JCPenney, along with Brookfield, out of bankruptcy.

JCPenney would be a bigger and “much more risky” proposition, Saunders adds. “It’s going to need a huge amount of investment to turn it round.”

“Give us just time to prove our thesis right,” David Simon says. “At the end of the day, if we screw up, we will have lost a de minimis amount of money.”

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By Alistair Gray

OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.

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