Simon’s and Brookfield’s investments in bankrupt tenants are relatively small. But the deals can give them critical control of the real estate involved
by Liz Wolf in National Real Estate Investor on July 29, 2020
As the coronavirus pandemic has accelerated the pain already felt in the retail sector with forced store closures, social-distancing restrictions and a significant change in consumers’ shopping behaviors, retail bankruptcies continue to pile up.
Nearly 40 retailers have already filed for bankruptcy this year, according to a July report by S&P Global Market Intelligence. This already exceeds the total number of filings for all of 2019.
While in the past, private equity players have acquired retailers out of bankruptcy, now new rivals are on the scene as the distressed retailers’ landlords are stepping in to rescue them.
The country’s largest mall owner Simon Property Group teamed up with apparel licensing company Authentic Brands Group (ABG) to bid $305 million for bankrupt luxury retailer Brooks Brothers. Simon and ABG are also bidding on bankrupt jeans retailer Lucky Brands.
Additionally, Simon, ABG and mall landlord Brookfield Property Partners are reportedly exploring a possible bid for bankrupt J.C. Penney. The longstanding department store chain is a major anchor tenant in both landlords’ portfolios.
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Now this same trio is seeking to acquire all or some assets of the Ascena Retail Group Inc., parent company of Ann Taylor, Loft and other clothing brands, which filed for bankruptcy protection this month. Ascena operates roughly 3,000 stores, primarily in malls.
Not the first time around
This isn’t the first time that Simon, Brookfield and ABG teamed up to rescue retailers falling on hard times. They purchased Forever 21 out of bankruptcy earlier this year in an $81 million deal. Also, GGP, which Brookfield later acquired, partnered with Simon and ABG to buy teen apparel retailer Aeropostale out of bankruptcy in 2016, saving hundreds of stores from closing.
Over the years, ABG acquired other retailers out of bankruptcy, including Barney’s New York, Juicy Couture and Nine West, while partners like Simon bring the real estate prowess.
It appears that the strategy used to acquire Aeropostale remains in Simon’s playbook. Company CEO David Simon told analysts on a post-earnings conference call last year that his company would consider other opportunities to invest in troubled retailers.
“We certainly have the ability to help beyond what you might do on the leases [and] become an investor in a distressed situation,” Simon said. We’re “certainly as good as the private equity guys, when it comes to retail investment. And so, I wouldn’t rule it out,” he said.
Simon added that the company would work together again with Authentic Brands Group on other distress situations, as long as the retailers’ involved had the requisite size and brand equity.
“These investments help [landlords] control the real estate and potentially look at other options to reorganize, restructure and do what they need to do to make the retailers that filed for bankruptcy come out [of bankruptcy],” says Ana Lai, senior director and analytical manager at S&P Global Ratings. “This pandemic has certainly brought a lot of pressure and disruption, but there are brands that people are looking at beyond the pandemic that are still viable.”
The closures of malls due to COVID-19 have exacerbated the problems of some retailers and led to increasing bankruptcies. While many of these embattled chains were already struggling, the crisis pushed some over the edge. Meanwhile, some malls have still not reopened, while surges in new COVID-19 cases around the U.S. have forced re-closings of others.
As a result, analysts anticipate that even healthy retailers could struggle under the pressure as the pandemic persists.
Buying distressed retailers at discounts
“The important thing to remember in this emerging trend is that there are likely multiple strategies in play that would vary depending upon the acquisition opportunity, and they all still ultimately have to do with whether landlords could purchase these brands at a low enough price out of bankruptcy for any of this to work,” says Garrick Brown, vice president of retail intelligence, Americas retail services, at real estate services firm Cushman & Wakefield.
In the case of some anchor tenants, it may have more to do with regaining control of the real estate than with the long-term viability of a brand, but there are likely shades of gray here, Brown notes.
That means “keeping the most vital stores alive, while closing the underperformers and paving the way for mixed-using and densifying malls,” he says.
This was already a trend pre-COVID, according to Brown, with roughly 400 U.S. malls in different stages of tearing down dead anchor spaces for hotel, office, multifamily and medical uses. “It’s a smart move, as it hedges the landlord’s bets and creates more density to benefit what is left,” Brown says.
Strongest landlords have wherewithal
Landlords with strong liquidity—like REITS like Simon and Brookfield—have historically been the ones to acquire bankrupt tenants, says Thuy Nguyen, vice president and senior analyst for Moody’s Investor Services and lead analyst for Brookfield Property REIT Inc.
“You’re not going to see that strategy being executed by landlords like CBL or Washington Prime. They have liquidly challenges to begin with,” she notes.
Additionally, the “surviving retailers want to be in high-quality portfolios in high-quality locations, and those are the portfolios of landlords like Brookfield and Simon,” Nguyen adds.
In spite of the challenges brought on by the pandemic, Simon still has deep pockets, with around $8.5 billion of liquidity on its balance sheet, including roughly $3.5 billion of cash available. Simon also recently completed a bond transaction for $2 billion.
The strategy to acquire bankrupt retailers might be a good move for Simon, says Ranjini Venkatesan, Moody’s vice president and senior analyst with the REITs group and lead analyst for Simon.
“The way they view it is that while they have the cash, they also have a sound understanding of the retail market,” she notes. “They know how much business their retailers do at what assets, and their retailers may want to continue having stores as opposed to closing stores, so they’re going to pick and choose based on all of that data.”
Meanwhile, Brookfield has created a new fund and said it would invest as much as $5 billion to help distressed retailers.
Types of retailers targeted for rescue
Landlords like Simon and Brookfield are likely eyeing retailers with business models that continue to be viable, but perhaps those that are having liquidity challenges during the pandemic.
“To make it through this difficult time, landlords are making an investment in these businesses that will help the retailers, but on the other hand, will also benefit themselves in the long run rather than having the stores go dark and having to deal with the vacancies,” Nguyen says.
It’s an even bigger play when it comes to anchor tenants like J.C Penney, because its store closures could invoke co-tenancy clauses of other retailers, which could lead to even more mall vacancies. Smaller retailers depend on anchors to drive foot traffic.
The move to acquire J.C. Penney would also allow the landlords to control the valuable real estate. In the case of the department store, there has been some debate about Simon looking to redevelop some properties where J.C. Penney owns the space. Acquiring the chain might give Simon a little bit more flexibility, Venkatesan notes.
However, some might ask if it’s a risky strategy for these mall REITs to acquire struggling retailers and move away from their expertise in real estate.
Nguyen says no. “Being REITS, there’s a limit to how much they can invest in other types of business outside of real estate,” she says. “We expect the earnings contribution from their retail investments to be small overall, but retail does give a different flavor to their earnings.”
Lai says Simon and Brookfield’s investment in troubled retailers is an “interesting strategy, but it’s a very limited investment in our view, and they’re partnering with others in the investment.’
“We don’t expect that to increase their risk level significantly,” she notes.
It’s a strategic move in the sense that if they were to own these distressed retailers and be successful, they could better manage their real estate portfolios, Lai goes on to say.
“They would have more control as opposed to leaving it up to others, who may end up winning the bid for the bankrupt company, or liquidation, which would be even a worse scenario.”
On the other hand, “there must be a limit to how much landlords can support their mall tenants,” notes Sarah Wyeth, head of S&P Global Ratings’ retail and restaurants division.
Struggling chains will have to figure out how to operate in today’s challenging environment.
“Each chain has unique hurdles to overcome aside from the broader trend of declining mall traffic,” Wyeth notes. “In addition to a successful digital platform, I think a mall-based retailer has to offer an exceptionally relevant and exciting product and experience to motivate consumers to make that special trip.”