The Outsized Role Simon Property Group May Play in the ‘Retail Reset’

The real estate advisory firm RCLCO just released its mid-year 2020 real estate projections, which includes opinions of hundreds of high-level real estate executives. And to no one’s surprise, they stated that “the retail sector was mostly seen in full decline in June.” Further, they stated that there was a wide variation between the secondary regional malls, which are hurting, and the healthier “fortress malls” and grocery anchored community/neighborhood centers. They also suggested that the “fortress malls” will be at or close to the bottom, a year from now.

For center owners and retail REITs that represents the sucking sound of cash flowing in the wrong direction. That, combined with the near-daily retail chapter 11 filings exemplifies an industry under extreme stress. Obsessive observers (like myself) also probably noticed an inordinate amount of news in recent weeks involving Simon Property Group.

Last week, on July 8^th, the markets talked about an “implied volatility surge” for Simon Property Group stock options (for which I know almost nothing about). This “surge” I’ve learned, usually suggests a coming event that might trigger a “big move” in the stock price, either up or down. That was on the heals of Monday’s July 6^th news-wire blip announcing that SPG
SPG was selling $2 billion of senior notes, to “bulk-up” for any number of impending moves. The shortlist includes:

J. C. Penney Bankruptcy – Wednesday, July 8^th marked the first deadline for JCP to deliver its bankruptcy business plan to (debtor-in-possession) lenders, to accept or reject the reorganization plan. A vote is scheduled to take place on Tuesday, July 14^th to decide whether there is a viable reorganization plan or a liquidation.

It was reported in the Dallas Morning News on Wednesday that Penney’s attorney’s appealed to the judge for more time. They stated, “our conversations have been incredibly productive,” referencing negotiations with not only with its lenders but also with potential buyers of Penney’s retail business and prospective investors in the REIT.

It has been widely reported that negotiations have been going on with several suitors, most notably the Simon Property Group, in conjunction with Brookfield Property Partners and Authentic Brands Group to purchase the company’s assets. This, in my opinion, might be the best outcome Penney’s and its creditors could hope for –more on that later.

Taubman Takeover – Simon’s attempt to extricate itself from the $3.6 billion deal to buy 95% of Taubman Centers

TCO
has led to suits, counter suits, and a court ordered mediation between the two parties. They have been given until July 31^st to come up with a mutually agreed upon outcome, or they will be meeting in a State of Michigan court in November, on Taubman’s home turf.  

Brooks Brothers – This past week’s not unexpected announcement of Brooks Brothers chapter 11 filing has also had Simon’s imprint on it. In mid-June, Simon took them to court over $8.7 million in back rent, but then mysteriously dropped the suit a couple weeks later.

According to a June 12 article in Bloomberg, Simon, along with brand management company WHP Global, who owns Anne Klein and Joseph Abboud brands had been in talks to buy Brooks Brothers. Last Wednesday, The Wall Street Journal reported that Brooks Brothers had in fact secured $75 million from WHP Global. The very next day Bloomberg reported Brooks Brothers received a higher offer from investors including Authentic Brands LLC, who most recently purchased Barney’s brand as well as assisting both Simon and Brookfield in resuscitating Forever 21. Suffice it to say that situation remains fluid.

“Simonizing” Retail

Could Simon Property Group end up doing multiple deals and survive? And are these converging events behind the “implied volatility surge” mentioned in the opening? Yeah, probably.

Simon is arguably one of the few retail entities that could attempt such a trifecta of expensive, complex undertakings and remain whole. Forbes investing contributor, Brad Thomas recently reported that Simon is in a very strong position financially, with roughly $8.5 billion, including $3.5 billion cash on hand and $5 billion in revolving credit and term loans. They also have a track record in the industry that is unmatched.

My February 21^st Forbes article, entitled “What Does the Future Hold for Malls? Look to Simon Property Group” examines why they are in league of their own. CNBC’s retail contributor, Lauren Thomas reported last week, that in the Compass Point listing of the top 30 malls (pre-pandemic), Simon owns seven of the top ten, grossing a whopping $9 billion, annually.

Grand Mall Seizure

There is a general industry consensus, that the pandemic has merely compressed the timeline for the creative destruction, or reimagination of the American Mall. To many of the 1,000 or so remaining fashion fortresses embody retail’s version of an 8-track tape player. The music is still good, the delivery system is not.

As we fast forward to the actual post pandemic period it is likely that all but the top A-class and B+ class malls will succumb. My favorite sage, Jan Kniffen reported on CNBC last month that he initially expected roughly 33% of America’s malls to go dark by 2030, he now thinks that will happen by next year, which would leave some 600 malls in the U.S. 

If Jan is right (and he usually is) the combined total of industry leaders’ Simon, Taubman, and Brookfield’s properties, totaling 427, would account for nearly 70% of the survivors. The average sales per square foot, across their three portfolios is north of $800 per sq. ft. By comparison a C+ mall does about $320 per sq. ft. according to Green Street’s analysis.  

Penney Saved?

When Penney’s filed for bankruptcy protection May 15th, they announced plans to close about 242 of their 846 locations, leaving them with just over 600 stores. Of those, Simon Property Group and Brookfield Development have a total of 162 Penney stores in their combined portfolios.

Their prime motivation behind the purchase is a co-tenancy clause in the specialty retailers’ leases that protects them from the malls’ losing their department store anchors. In such an event, it opens the door to allowing the renegotiation of terms, something mall owners can ill afford, particularly now.

According to Statista, as of 2019 J.C. Penney was generating a meager $114 sales per square foot. In my opinion, should the Simon/Brookfield/ABG consortium prevail, they would likely trim significant numbers of the remaining 400 plus Penney stores, beyond the confines of their malls.

Besides picking up a significant amount of real estate on the cheap, the ability to feature the portfolio of Authentic Brands Group at JCP would be significant. Brands like Aeropostale and Forever 21 could help the sleepy Penney’s product mix, while engaging a younger customer, on and offline.   

One cannot overstate the degree to which Simon and friends are walking a retail tightrope at a time when the only constant in our lives is fear and uncertainty. However, I remain convinced that most of this groups’ properties and growing brand portfolio will play a role in the highly disrupted world of unified commerce, in years to come.