Mall Owners Are Acting More Like Private Equity Firms Buying Failing Retailers

Matty-Sways

In 2016 three major mall owners teamed up to buy Aeropostale and made a ton of money off it, now they hope to repeat it.

Numerous apparel brands like J.Crew, Brooks Brothers and New York & Co. parent company RTW Retailwinds. Department store chains Neiman Marcus, J.C. Penney and Stage Stores. The health chain GNC. The kitchen supplies company Sur la Table. All of these brands have filed for bankruptcy and now the owners of some of the biggest malls in America are looking to cut deals to save them.

The biggest mall real estate owner, Simon Property Group, has roughly $8.5 billion of liquidity on its balance sheet, including about $3.5 billion of cash on hand. Simon recently collaborated with Authentic Brands Group to loan $80 million to Brooks Brothers to get them through bankruptcy. The collaboration will be known as Sparc LLC and have offered Brook Brothers a rare deal, with no interest or fees. However, if Brooks Brothers is liquidated then Sparc would keep its intellectual property. Sparc has also put in a bid of $191 million for the bankrupt denim maker Lucky Brand's assets. (The court will decide whether the duo can handle the financing by July 27).

Additionally ABG, Simon and Brookfield Properties have begun discussions regarding acquiring department store chain J.C. Penney out of bankruptcy. The three have already saved the apparel chain Forever 21 for $81 million. ABG already owns retailers including Barneys New York, Nautica, Nine West and Juicy Couture.

"I think this is an opportunity for the Simons of the world," said Scott Stuart, CEO of the Turnaround Management Association. "They're acting like their own private-equity firms. They are sitting on a lot of cash and they are testing the waters."

"I think Aeropostale laid the foundation that this could work," Stuart added. In 2016, Simon and General Growth Properties (now owned by Brookfield), worked with ABG to buy the Aeropostale brand out of bankruptcy court for $243.3 million.

"I think it's very possible — we're going to be very smart about it," Simon said at the time, when asked if he would consider investing in more of the company's tenants. "We're certainly as good as the private-equity guys when it comes to retail investment. And so, I wouldn't rule it out."

"We'll work together on other distressed situations." But, he added, "we're only going to buy into companies that we think have brands and that have the volume that is worth doing it."

"I think investors would rather see them spend capital on their business," Mizuho Securities analyst Haendel St. Juste said.

"It feels like it is a slippery slope," he said. "I get it, these are large tenants. But that's not your business."

"I didn't like it when they bought Aeropostale," he added.

Brookfield created a new fund planning to spend as much as $5 billion to help struggling retailers.

"The view is, these are good brands that need to be preserved," said Byron Carlock, the head of PwC's U.S. Real Estate practice.

"Now, is there a new normal that better manages the financial risk of being in retail?" he said, referring to real estate companies versus private-equity firms.

"Take Brooks Brothers," Byron said. "Nothing is wrong with the brand. The owners just over-expanded."

"The advantage of Simon is they are so big, they can make these bets," Green Street Advisors mall analyst Vince Tibone said. "But they have to be selective."

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