Simon sees a big and profitable upside in acquiring retail tenants

Discussion
Photo: Getty Images/anouchka
Aug 11, 2020
George Anderson

Simon Property Group CEO David Simon said his company is looking for opportunities to acquire once-successful retailers on the cheap as the effects of the novel coronavirus pandemic continue to force a record number of chains (AKA as tenants) to file for bankruptcy.

Speaking on his company’s second quarter earnings call yesterday, Mr. Simon said that Sparc Group, a 50/50 joint venture with Authentic Brands Group (ABG), has submitted stalking horse bids for Brooks Brothers and Lucky Jeans. Those two, along with Brookfield Property Partners, another mall owner, have also made a bid to acquire the bankrupt J.C. Penney business. Simon, ABG and Brookfield previously came together to jointly acquire the Aeropostale and Forever 21 chains.

Mr. Simon said his company’s investments in the three deals, should they prove successful, would be significantly lower than is usually speculated on by analysts and pundits in the press. He also pointed out that merchandise is purchased at or below cost by Simon and its partner(s) when a bankrupt chain is acquired.

“I don’t buy into this … that we’re buying into these retailers to pay us rent,” said Mr. Simon. “We’re doing it because we, for one reason only, we believe in the brand and we think we can make money. If we didn’t believe in the brand and we didn’t think we could make money, we wouldn’t do it …”

“Those same people [questioning Simon] are probably the same people that told Amazon to stay just in the book business, okay? So, let’s just think a little bit — there’s just nothing out there that says you can’t make smart investments outside of your core businesses, which is what we do all the time. And, look, Kimco did it with Albertsons. They did a pretty damn good job, and kudos to them.

Mr. Simon declined to respond to a Wall Street Journal report this weekend that the mall operator was in discussions to lease current or former Penney and Sears stores to Amazon.com to set up local distribution hubs. Simon, the largest owner of malls in the U.S., has 63 Penney stores and 11 Sears on its properties.

Simon’s net income for the second quarter was $254.2 million, down from $495.3 million the year before. Comparable property net operating income was down 18.5 percent for the three months ending June 30. The mall owner collected 51 percent of its contracted rents for April and May combined, 69 percent for June and roughly 73 percent for July.

DISCUSSION QUESTIONS: What is your reaction to David Simon’s explanation as to why his company is acquiring troubled retail chains that are also tenants? What do you think about retailers and other companies making investments outside of their core businesses?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"I think one possible future for these malls (not the upscale ones) is to basically eliminate the middle man and fill the mall up with chains the operator owns."
"David Simon is correct that the acquisition strategy is about turning investments into big returns not covering rent payments, a losing idea."
"There is a clear co-dependency at play here with Simon investing in and stabilizing their prized retail tenants."

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32 Comments on "Simon sees a big and profitable upside in acquiring retail tenants"


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Paula Rosenblum
BrainTrust

I think one possible future for these malls (not the upscale ones) is to basically eliminate the middle man and fill the mall up with chains the operator owns.

It’s certainly a better idea than turning them into industrial zones.

Suresh Chaganti
BrainTrust

Simon is concentrating the risk instead of diversifying. They could be getting some of these retail brands at very cheap valuations.

But running retail brand requires significantly different competencies than running retail real estate. The success depends on few factors – How much free hand will Simon give to the brands? Do they have the strategy and commitment to make the required investments in these brands?

There is synergy, but it brings as much risk of concentration.

Mark Ryski
BrainTrust

I appreciate Mr. Simon’s public explanation for why they’re acquiring troubled retailers, but I question the strategy in general. Can Simon (and their partners), really turn these troubled retailers around? Perhaps, but there’s a very good probability that no matter what Simon does, these brands won’t be successful. Notwithstanding my concern about Simon acquiring troubled retailers, I think it’s vital that all businesses continue to look forward and place strategic bets on business opportunities beyond their core.

Xavier Lederer
BrainTrust

I share your concern, but the question is: what would happen if Simon wouldn’t buy these troubled retailers? Brands like J.C. Penney attract traffic and other, smaller retailers to a mall; the value they add is therefore much higher than the rent they pay. Simon’s reasoning might be very pragmatic: they need these brands to stay around at least until shopping malls figure out a new business model to attract traffic and other retailers. And it would be a cherry on the cake if, on top of that, they would manage to make money in a few years when they sell these brands that they acquired on the cheap.

Gene Detroyer
BrainTrust

I don’t think Simon has much interest in turning the brands around. This is a cash flow strategy and if the brands get resurrected, Simon will say, “we got lucky.”

Carol Spieckerman
BrainTrust

The core is no more. Diversification, particularly business model diversification, is the growth engine of the future for retail. Building brand portfolios is one side of that story, whether the brands are retailers, licensing entities, or former wholesale brands. There is no reason Simon shouldn’t snap up struggling retailers, even if it equates to serving as a middle man to Amazon.

Bob Phibbs
BrainTrust

If the brands themselves couldn’t figure out how to be profitable, why think their landlords can? With the dubious prospect of bringing Amazon to those same properties, this doesn’t sound like a smart move.

Ben Ball
BrainTrust

It is tempting to compare Eddie Lampert and Sears with David Simon (and partners) and the retailers they are buying. That’s a mistake. The SPG/ABG team understand retail, and SPG understands value beyond “real estate.” Those two differences are critical. And to return to Amazon for a moment, SPG also understands how to parse space and create traffic patterns that I think can make the Amazon distribution centers work just fine.

Harley Feldman
BrainTrust

The Simons are trying to turn the negative situation with their shopping center properties into a positive outcome. Their strategy of purchasing retail properties for a deep discount, if successful, will provide large returns to the company. David Simon is correct that the acquisition strategy is about turning investments into big returns not covering rent payments, a losing idea.

The biggest challenge to Simon Properties is their delving into the retail industry when their backgrounds are in property management. They will need to find competent executives to manage these retail businesses and know when their investments are doing well and when adjustments need to be made.

Gene Detroyer
BrainTrust
“I don’t buy into this … that we’re buying into these retailers to pay us rent,” said Mr. Simon. “We’re doing it because we, for one reason only, we believe in the brand and we think we can make money. If we didn’t believe in the brand and we didn’t think we could make money, we wouldn’t do it …” This is PR gab. The decision to buy these brands out of bankruptcy is good from a business point of view. If the retailers liquidate, there is no cash flow from the properties. And there is nobody on the horizon to take over the spaces. So the value of the property is zero. So you pick up the brands for a song, out of Chapter 11. Now imagine the P&L without rent. You will get a positive cash flow, even with minimal sales. This is a no-brainer. And if by some stroke of luck you resurrect the brand, you sell it for multiple songs beyond what you picked it up for. This is not a… Read more »
Brett Busconi
Guest

I like the idea, I just question some of the brand choices. (There are good reasons some of these brands were unsuccessful.)

Investing outside of your core business can be a great method to maintain/grow the business.

Mohamed Amer
BrainTrust

Simon Property Group is wise to consider these bankrupt investment options. In managing the revenue stream risk, this additional option diversifies risk unless such expansions become over concentrated in the portfolio. A major advantage Simon has is their “inside” information on historical and detailed sales performance of their tenants by location.

Ken Morris
BrainTrust

Mr. Simon is spot on! He is in the business of making money and if he can buy something at under market value, why would he not do so? One of the secrets of retail is that many retailers are worth more for their real estate value than for their product. There is an opportunity for a real estate firm to make back their investment on that strategy alone. They also can get creative in what they do with the properties they own. I tossed out the idea of micro-fulfillment centers (MFCs) for the tenants in each mall yesterday replacing the anchors. This is being tried elsewhere in the world and I believe Simon needs to pursue this acquisition strategy, the Amazon DC idea and my MFC strategy.

Dick Seesel
BrainTrust

If this sort of “vertical integration” — the property owner acquiring the tenants — was a sound strategy, why didn’t Simon pursue it a long time ago? Right now, it looks like an attempt to keep as many rent-paying stores alive as possible, despite Mr. Simon’s claims otherwise. Many of the retailers in question had their own sustainability issues (from debt overload to brand irrelevance) long before COVID-19 brought things to a crisis point.

The Simon mall of the future may look very different — a hodgepodge of an Amazon hub at one end, a movie theater in the middle, a fitness center at the other end, and a bunch of marginal (but company-owned) specialty stores in the middle. Will this model attract the strongest of other tenants, like the Apple store? Hard to say.

Dick Seesel
BrainTrust

Just to add a thought, maybe this is a “buy low, sell high” strategy on Simon’s part. Invest in these distressed but well-known retailers for a song, and (if they turn around) sell them to another investor or spin them off via IPO or private equity deal. But this gambit assumes that Simon and its partners have the operating skills to turn these brands around, not just collect rent checks.

Bob Amster
BrainTrust

While I don’t think that operating outside of your core competency is ever a good idea, the operative word here is that Simon should not attempt to “operate” these investments. While investing in them, they can afford to be more flexible with leases and enjoy the profits that the investment might make.

Brandon Rael
BrainTrust

There is a clear co-dependency at play here with Simon investing in and stabilizing their prized retail tenants. It’s an outstanding short term strategy of providing the immediate cash and liquidity the retailers need to stay afloat, and it ensures that Simon’s malls continue to draw the level of traffic they are used to.

The purpose of malls always has been and will be centered around consumers and commerce. While filling the vacant anchor spaces with micro-fulfillment centers may prove to be a short term gap-fill, the real draw of the mall is the art of the discovery, and the treasure hunt of shopping at your favorite retailers.

Running a retail operation is far different compared to a real estate company. Through these acquisitions and investments, Simon will have to acquire the human capital to run the retail operations. Particularly around the key skill sets to run the merchandising, assortment, marketing, store operations, e-commerce operations.

It will be interesting to see how this plays out.

Ricardo Belmar
BrainTrust

This is a numbers game pure and simple for SPG and mall owners like them. Their financial analysis tells them if they buy those retail brands cheap enough, with at-cost or better merchandise, clear the bankruptcy to eliminate debt, then they can turn the brand around and avoid losing a rent-paying tenant.

Another way to look at this is that SPG is trying to vertically integrate its business. The mall is a marketplace, and they’re trying to own the sellers on that marketplace so they can profit from the merchandise sold to consumers. This is analogous to what happened to independent pubs in the U.K. that were bought up by breweries and distilleries to sell their own brands. Vertical integration, while not easy to pull off, can result in good financial growth if executed well. The real question is – is SPG investing/buying the RIGHT brands for their malls? As others here have pointed out, some of these brands failed for a reason and cheap capital isn’t necessarily going to bail them out.

Ananda Chakravarty
BrainTrust

Spot on Ricardo. This is a numbers game plain and simple. Who wouldn’t want to pick up the inventory, operational equipment, brand name, and owned property assets for 10 cents on the dollar? For Simon, they don’t care if they liquidate or not – either way they come out on the winning end. Smart move.

Peter Charness
BrainTrust

Sometimes (not always) retailers are doing perfectly well from an operational standpoint, but are over-leveraged and because of debt can’t quite make ends meet. If Simon can take operationally profitable retailers and as a result of acquisition de-leverage them, then they can make this work and protect their own rental income stream. They can do what the CFO can’t. This won’t be the case with all the opportunities, but sometimes a cleaned up balance sheet is a good road to a sustainable retail model. Success isn’t only found in the merchandise or marketing offices.

Jeff Sward
BrainTrust

The simple act of a retail landlord acquiring a retail tenant does nothing to address the underlying cause(s) of the deterioration of the mall. What makes it all REALLY interesting is the news of the role Amazon might play in all of this. And there is a lot of news. Fascinating to watch this Tuesday morning as of 10:07 AM — Simon Properties is up 7 percent and JCPNQ is down 6 percent as they head into tomorrow’s bankruptcy update court date. Bets are being placed — and the day is young.

Phil Rubin
BrainTrust
1 month 18 days ago

I’m happy to be a contrarian in this discussion. Simon has little choice but to make some kind of pivot, such as acquiring bankrupt retailers, as physical retail is not going to return to its prior size. Many of these retailers, however, are bankrupt for good reasons — including their own irrelevance and lack of customer focus. Those that are iconic and mono-brand, like Brooks Brothers, are worthy of consideration, but so many others have little in the way of brand power, pricing power or reason for being in general.

The U.S. was over-stored before the pandemic and like so many other aspects, it’s simply accelerated and amplified many trends that were already in place, including the shift to digital commerce.

David Weinand
BrainTrust

I like the idea but like so many other deals that have blown up, there is a cautionary tale to be learned – load too much debt onto these retailers and their chance for success is low. By buying distressed companies that can write off their current debt, the model could serve as a home run.

Neil Saunders
BrainTrust

I agree that these deals are about more than saving companies so they can pay rent, although that is almost certainly a consideration. However although there is an opportunity here there is also a substantial risk. A great deal of effort is required to turn these brands around and the long-term prospects for many are debatable, especially as shopping habits are now shifting and changing dramatically. There is no reason Simon and its partners cannot do a better job than the previous management teams, but I constantly wonder whether these investments are simply going to become a headache further down the line.

Dave Bruno
BrainTrust

I think Paula Rosenblum’s idea for a mall full of operator-owned brands is a brilliant idea! Maybe Simon can create a new model of collaborative brands all rowing in the same direction, with collaborative strategies, assortments and promotions. I don’t get the sense that this idea is part of Simon’s plans as of yet, but here’s one opinion suggesting it should be!

Ananda Chakravarty
BrainTrust

For Simon this is all about getting good deals at fire sale prices and verticalization. The investments are low risk plus Simon remains the key creditor by being the landlord in the stores’ leasing deals. If anything, Simon is exceptional at asset management, and by making these purchases they are bringing in high value merchandise inventory – some with long shelf life – plus the equipment, brand names, and some of the operational staff to run these businesses effectively. They can expand real estate as well in places where the brand actually owns rather than leases some of their property. The point is, this isn’t outside their main business at all.

Maurice_Bretzfield
Guest

It seems to me that Simon doesn’t understand why fashion retail has collapsed. The pandemic isn’t the primary cause, it’s “the straw that broke the camel’s back.” The entire sector has been heading for this disaster for years and no mall operator is going to bring customers in to shop at zombie retailers.

BC (before Coronavirus) the consumer was screaming that they simply didn’t care anymore. Do you remember when we were talking about how consumers weren’t buying goods because they were buying experiences?

AC (after Coronavirus) the entire fashion industry has collapsed with consumers very comfortable in their sweatpants! (Read about the collapse of the fashion industry here: Sweatpants Forever: How the Fashion Industry Collapsed.)

Good luck Mr. Simon, but I believe that you will rue the day you did this.

Patricia Vekich Waldron
Staff

Mall operators owning/operating retail brands is nothing new in other parts of the world like China, SE Asia and Africa. The difference here is that Simon is betting they can revitalize troubled chains as a way to reinvigorate and remake malls.

storewanderer
Guest
1 month 18 days ago

Simon may be able to run a little 5,000 square foot narrowly merchandised with 2 employees on duty Aeropostale okay. But I have serious doubts about their ability to run a 300 employee 200,000 square foot J.C. Penney store. You can also lose a lot more money trying to run a 200,000 square foot box, than a little 5,000 square foot space.

We will see how this goes.

The reason the malls have lost relevance is because customers are not interested in these retailers anymore. They need to bring in NEW retailers, not keep the ones in the mall that have failed.

The mall owners, if they want to go into retail, should come up with their own new and fresh retail concepts. Not trying to keep running bankrupt brands.

No wonder the malls are failing with how they do things.

Craig Sundstrom
Guest

My reaction to this strategy is the same as before: there’s an inherent conflict of interest in leasing space to someone and also owning a store (or stores) in the same mall that’s competing with them. “But wait a minute,” one might ask, “isn’t that exactly what department stores did in the early days of center development?” Perhaps, but the dynamics of being a retailer (developer on the side) are different than being a developer (retailer on the side); and the fact that department stores became less prominent in the field over time suggests it’s not an optimal relationship.

Back to Simon: their strategy may well work, but really what choice do they have? I’m not going to say they’re lying, but I will say there’s a definite feel of “let’s-make-lemonade” — if not outright desperation — in their timing.

George Anderson
Staff

One element that I think isn’t always considered in discussions about Simon’s moves to acquire retail chains is the role of Authentic Brands Group (https://www.authenticbrandsgroup.com) in these deals.

Here’s what David Simon said about their partnership: “Authentic Brands Group, is a fantastic intellectual property group, does business throughout the world and has a ton of brands. So, normally – and they provide a lot of value on sourcing, marketing, international operations, et cetera. So, normally, when we’re doing that, we work with them. They’re very, very good about understanding where there is value in the brand because they know how they can monetize that intellectual property. Obviously, we have a point of view because we know what the consumer likes. So, you put the two of us together in a room and that’s how we do it. So, we rarely play. I mean, there have been unfortunately a lot of bankruptcies this year. It’s not like we’re playing in a lot of them.”

William Passodelis
Guest

Management and execution will be SO IMPORTANT! As others have said: vertical integration. So the mall becomes one GIANT (Department) Store.

I DO hope it works!

wpDiscuz
Braintrust
"I think one possible future for these malls (not the upscale ones) is to basically eliminate the middle man and fill the mall up with chains the operator owns."
"David Simon is correct that the acquisition strategy is about turning investments into big returns not covering rent payments, a losing idea."
"There is a clear co-dependency at play here with Simon investing in and stabilizing their prized retail tenants."

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