Photo: RetailWire
Should Simon Property Group bail out (invest in) more retail tenants?
Thousands of retail stores have closed in recent years with the prospect of thousands more to come. What’s a mall landlord to do? For Simon Property Group, the largest operator of malls in the U.S., one answer may be to take a stake in struggling chains (AKA tenants) to help them keep their store doors open and lights on.
David Simon, chairman, CEO and president, said on Simon’s second quarter earnings call that the company has the resources — “$6.8 billion in liquidity” — and the eye for the right deals — “We’re certainly as good as the private equity guys when it comes to retail investment” — to consider taking stakes in the right tenants going forward.
Mr. Simon pointed to the success that his company has had with its investment in Aeropostale. In 2016, Simon along with General Growth Properties (now part of Brookfield Property Partners) and some liquidators bid $243 million to keep 227 Aeropostale stores operating after the teen clothing chain failed to find buyers for its bankrupt business.
At the time of the deal for Aeropostale, Ray Schrock, a lawyer for the retailer, told the bankruptcy court that the investment “could be a model for future restructurings in the years ahead.”
While Simon has clearly not jumped in to save struggling tenants since Aeropostale, the mall operator may have a new opportunity with Forever 21, according to reports by Bloomberg and CNBC. Forever 21 has found itself facing headwinds in recent years as sales slowed at the same time the chain countered the industry trend by expanding its average store footprint.
The fast fashion retailer, according to a Bloomberg report in late June, has “a small faction” within the company who support working out investment deals with landlords as a potential way forward for the business. The same report, however, said Forever 21 co-founder Do Won Chang and others oppose selling a stake to Simon or other landlords.
While not speaking to any specific opportunity, Mr. Simon told analysts that his company would likely work with partners again if choosing to invest in a retailer or brand. He pointed to the success that his company had working with GGP and later Brookfield on the Aeropostale deal.
Mr. Simon also mentioned several times on the call with analysts that the mall operator is not facing a crisis situation with tenants, despite announcements of retail bankruptcies. He pointed to increased revenue comps for his business and how Simon has found creative uses of newly opened spaces to keep traffic strong.
- Simon Property Group, Inc (SPG) CEO David Simon on Q2 2019 Results (Earnings Call Transcript) – Seeking Alpha
- Forever 21 Officials Approached Landlords About Possible Purchase – Bloomberg
- The biggest mall owner in the US could be the one to save retailers on the cusp of going out of business – CNBC
- Why did mall landlords step in to save Aeropostale? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you think Simon Property Group should be looking for solutions beyond rent relief to support select retail tenants? Is it a wiser move for Simon and other mall operators to invest in struggling tenants or to find alternative uses for space that previously housed department store anchors and other specialty retail businesses?
Poll
BrainTrust
Carol Spieckerman
President, Spieckerman Retail
Peter Charness
Retail Strategy - UST Global
Simon and other mall developers may want to use the Aeropostale blueprint to prop up other specialty retail tenants, but only if they have a sustainable model and brand position in the first place. Otherwise, it’s throwing good money after bad — and mall developers need to focus on redevelopment of empty mall anchors first. (One Simon mall here in Milwaukee has lost three of five anchors in the past two years.) Without this focus, trying to salvage other tenants may be a bad investment.
The answer to this really depends on the nature of the investment. If the business is viable and just needs an injection of capital and some restructuring then I see no harm in making a play. However, if the business has deeper issues because demand has dropped off or it’s no longer relevant in the market, then I see little sense in chucking money around to keep it afloat.
While I am not a pessimist about physical retail, there is a need for space reduction in the U.S. and neither Simon nor any other player can buck that general trend.
I think the relationship between mall operators and tenants needs to change, and Simon Property Group is perfectly positioned to do so. Unlike private equity firms, mall operators have a vested interest in the success of their tenants. Mall operators should explore investments in struggling retailers, whether that’s direct investments or other support services. And mall operators should also be exploring alternative use for spaces that drive traffic opportunities into the mall. Ultimately the success of malls will be tied to the success of the retail tenants and a closer, more collaborative relationship will be better for all.
It makes sense for Simon Properties to make select investments in retail(ers). Simon has the broad view of locations and possibilities and can therefore flex its portfolio to make use of brick and mortar assets. As the digital rethinking of brick and mortar takes shape, Simon’s ability to invest in these locations could accelerate innovation overall. Who better to get a piece of the action?
I think it’s an excellent strategy for mall operators, in this case, Simon Properties to work with struggling retailers and when necessary invest in them. However, that should be based on the retailer’s potential. In the case of Aeropostale, one could argue that what hurt the retailer was the sale to the private equity firm and the fact that since the deal with Simon Properties changed ownership, the company has turned things around. I know that some people believe that stores will eventually go away. I do not, nor do I think malls will disappear any time soon. However, we are dealing with changing times, changing needs, and no doubt, significant changes with how we shop and make a purchase. The internet has been the main reason, but the web is useful mostly for when the customer knows exactly what he or she wants, either from a previous purchase or from researching an item which most likely included visiting stores. So retailers and mall operators have to ride out this trend a bit further as we develop the right balance between stores and online shopping. Providing the customer what they want when they want it, whether it be in-store or online is the key to success.
When the Aeropostale deal was done a couple of years ago, it represented new out-of-the-box thinking for a mall operator. Aero was a mismanaged but not badly damaged brand. And the math looked compelling whether the new investor was PE or a mall owner. Now it just plain makes sense for a mall owner to give a struggling retailer this kind of consideration. It’s a potential double win. One, as a simple investment. And two, as a very efficient solution in preventing a messy vacancy. But it is still very much a case by case basis. As mall owners find and develop new alternate uses of space, investing in a struggling retailer is just one of the choices. And may or may not be the best use of space in an evolving mall environment.
This type of investment is in the best interest of mall operators IF the retail chain had shown signs of being viable with an influx of capital and rent relief. Since not all failing retailers are in that position, for mall operators to invest in them is not a cure-all. Do your due diligence!
My opinion differs from some of the other BrainTrust comments here in that I believe Simon Property Group should invest in their formats and brand position before taking on investments in the format and brand positioning of their tenants. If I were in Simon Group’s position, I would invest some of that $6 billion dollars into creating mixed-use spaces that appeal to the modern shopper. We have seen existing stores thrive where modern malls thrive, and the malls that are thriving are those that have adapted to new lifestyles and expectations.
In other words, invest in the new consumer trend rather than spending trying to support the old one?
I know a couple of billionaires who made their money by taking equity in Silicon Valley start-ups rather than rent. I am not sure this is the same issue.
If the mall property owners have an opportunity to get a better return though an investment (cutting rent) than by the rent itself, then, by all means do it. And, make sure the “investment” is in the company and not related to the the success of individual stores in any mall, or no mall at all.
But if the retailer is struggling, stay away and find a better use for your property. Retail malls as we know them are not coming back. Hopefully the property owners will rejuvenate their property, but not with down trending retailers.
If we were talking about Amazon taking a stake in marketplace companies who need a little help this board would be lighting up like crazy. I suppose mall owners can also be PE companies, but they will open themselves up to all sorts of challenges if they give favorable treatment to “owned” companies. I’m more on the side of focusing on keeping their physical assets interesting and vibrant. Despite the fact that retail looks “easy” to those outside of it (or closely related to it), other than money and (favorable workout) terms what does Simon really bring to a suffering retailer?
Clearly it’s no longer enough to simply be a shopping mall developer that sells square footage and let your tenants flounder in today’s race to figure out how to survive and thrive with a brick-and-mortar presence in an Amazonian world. Simon and others should be working collaboratively with their tenants so that both survive and prosper. Here is one fun fact that developers should react and seize upon – a brand’s online business has been shown to increase as much as three fold within 20-30 miles of it opening a physical store. That’s an invaluable insight! Working collaboratively with tenants, property owners could facilitate and cater to this community — sharing in this revenue while increasing the value of its square footage.
Generally speaking no. However, Simon and all mall operators need to be thinking about a 21st century partnership model that involves providing those retailers with resources at the coalface of their field operations. Whether that is providing learning and development opportunities for store teams, or meaningful ways to drive foot traffic (not valet parking) – there’s more to the relationship than merely square footage.
There are a lot of things to recommend about this idea — not least that investment from landlords would focus on making the retailer productive in order to maintain rents.
There are also huge risks. While Simon may have tremendous experience with retailers and evaluating risks associated with mall leases (including percentage of sales deals), evaluating a retailer for investment is a very different beast.
I’m cautiously optimistic about this approach, but keenly aware of the risk for Simon.
Rent relief in and of itself will not necessarily result in success. Rent relief will not be successful if the retailer continues with normal operating procedures. If, however, the retailer has a sound plan for improving business and rent relief would allow for investment in a new plan, there could be a chance for success. Then the retailer and investor would both win.
Depends on the terms, the retailer, and the market. Investing in failing businesses so that you can keep your rental properties full may be a good bridge strategy, but it doesn’t seem like a long term solution for the woes of mall retail or for Simon.
First thing is, Simon must exercise some brain work and determine if their centers are credible and right on a location by location/retail offering basis. Then the determination must be on correct retailer offerings, followed by cash infusions AND lowered rental dynamics to allow their struggling retailers a shot. Percentage rentals such as a percentage of sales, with a smaller percentage of credit card sales. A percentage lease to hold both retailers’ and landlords’ feet to the fire. Thus, both retailer and landlord have to fight to win together!
I believe that “Aeropostale-type” deals are going to be the exception and not the rule. Simon should be very careful to invest where they have competitive advantage and focus their significant expertise to lead the transformation of older malls into the modern world of shopping and entertainment.
Think of this: if you’re Simon, would you invest in keeping J.C. Penney on your site? Hell no. However, lowering rent, searching for new, non-retail tenants and creating a central BOPIS pick up center in the parking lot or mall would go a lot further than that idea!
Look what happened in NYC. Landlords wouldn’t budge so empty spaces proliferated throughout the city. Their tune is changing now, but as usual, developers/landlords are slow movers (with exceptions like Steiner Group) and also blow a lot of sunshine to the press about footfalls and everything being “ok.” A solid reality check, like what happened in NYC, is way overdue.
I think the conflict of interest (in being both a landlord and competitor) is self-evident, though I’m sure Simon would make the counter-argument that having vacancies hurts all tenants. So I’m not going to say “never!” but I AM going to say “last resort.”
No investment in retail firms. Simon and other USA Malls need to transform themselves into ALLS with housing, office space, hotels and entertainment. They need to include all the tenants a family needs including grocery, gyms, doctor’s offices and day care. ALLS work all over the world. Live, work, shop and recreate in the same place and drive your car occasionally. Money spent to prop up failing tenants is lost capital. The greatest asset USA malls have are the open parking lots that surround them.
Your post was way down at the bottom, otherwise I wouldn’t have posted separately. I cannot agree with you more, across the board and it seems that it is the singular alternative that has the most sustainable revenue potential as well as alleviating many of the issues that are currently pressing (housing, quality of life, small business growth, etc.).
I often wonder why they aren’t looking to incorporating residential and turning malls into villages, considering that the model of Main Street with residential above retail continues to be utilized. I’m probably missing something huge since I’ve no experience with residential properties/development.