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.

Line chart of Occupancy rate (%) showing More units lie vacant in Simon properties

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.

Bar chart of Anchor and in-line tenants by sq ft (m) showing Struggling and bankrupt chains among Simon's biggest tenants

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.

Simon tries on clothing brands

AÉROPOSTALE

Developed as a private label for Macy’s in the 1980s, Aéropostale became known for affordable gear aimed at teenagers and early twentysomethings. The chain went public in 2002, but later struggled to compete in the highly competitive youth fashion sector. Aéropostale racked up a series of losses before filing for Chapter 11 in 2016.

forever 21

Forever 21 was founded in 1984 by a husband and wife duo, and its combination of frequently changing styles and low prices made the brand popular among young women. But in recent years it lost ground to rivals including H&M and Primark. The company, which had particularly large stores, filed for bankruptcy last September.

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.

Nautica

Founded in 1983 by an immigrant from Taiwan, the outerwear company was sold to the clothing conglomerate VF, 20 years later. But the yachting lifestyle brand was outshone by VF’s more successful labels such as North Face and Timberland. Authentic Brands bought the brand in 2018. Today it is part of Sparc, the joint venture between Authentic and Simon.

Lucky Brand

The jeans company was founded in 1990 in Los Angeles and built a successful casualwear brand themed around music and Americana. Purchased by private equity group Leonard Green in 2013, it was burdened by a heavy debt load and the coronavirus shutdown proved too much. Lucky, which had more than 200 stores, filed for bankruptcy in July.

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.”

Brooks Brothers

Started in 1818 by Henry Sands Brooks, Brooks Brothers made upmarket suits worn by generations of Wall Street bankers as well as presidents from Abraham Lincoln to Bill Clinton. But as workplaces became more casual over the years, the brand fell out of favour. Brooks Brothers had more than 400 stores before it fell into Chapter 11 last month.

JCPenney

An acquisition of JCPenney would be of a different order of magnitude. The department store stalwart had more than 800 stores and employed about 90,000 people before it slid into Chapter 11 in May with over $7bn in liabilities. A disorderly collapse would be a problem for Simon, given that the mass market chain has 57 stores in its properties.

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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