When Brooks Brothers filed for bankruptcy last month, court filings showed that it owed as much as $1 billion to thousands of creditors, including $10 million to one of its biggest landlords: Simon Property Group.
Now the nation's premier mall operator is also its owner.
In recent weeks, Indiana-based Simon snapped up bankrupt retailers Brooks Brothers and Lucky Brand, and bid on another, J.C .Penney. It also is reportedly in talks with Amazon to turn space once filled by Sears and other department stores into e-commerce warehouses.
Analysts say the succession of deals gives Simon a roster of iconic brands for rock-bottom prices and steady rent. Others see desperation that only delays the inevitable demise of dozens of flailing malls across the country.
Like many of its peers, Simon temporarily shut all 175 of its U.S. malls and outlets in March, and was reported to have furloughed about 30% of its workforce. It delayed more than $1 billion in redevelopments. Major tenants like the Gap stopped paying rent, while others began pulling out of leases. Apparel chain Abercrombie & Fitch, meanwhile, is suing Simon, alleging that it "wrongfully extracted rent payments" during the pandemic. In all, Simon collected about 51% of retailers' rent payments in April and May, and about 70% in June and July, executives said on an earnings call this month.
[CORONAVIRUS: Click here for our complete coverage » arkansasonline.com/coronavirus]
PROPPING UP TENANTS
Now the company is investing millions to prop up some failing retailers, in hopes of keeping occupancy rates up and rent payments coming in.
Last week, Simon -- in partnership with licensing firm Authentic Brands Group -- paid $325 million for Brooks Brothers and $140 million for Lucky Brand. They also are teaming up with Brookfield Properties to pursue J.C. Penney. The trio acquired apparel chain Forever 21 earlier this year, and Aeropostale in 2016.
Ali Slocum, a spokeswoman for Simon, declined to comment.
Simon's properties include some of the nation's premier shopping malls, including King of Prussia near Philadelphia and the Houston Galleria. In the Washington, D.C., area, its portfolio includes Fashion Centre at Pentagon City, Leesburg Premium Outlets, Potomac Mills, Arundel Mills and St. Charles Towne Center.
Simon also owns McCain Mall in North Little Rock.
"Without question, the pandemic has obviously had a dramatic impact," Chief Executive Officer David Simon said in an August earnings call. "The Great Recession frankly pales in comparison to what we're dealing with. Obviously, the amount of bankruptcies in our sector is tremendous."
Several mall staples have filed for Chapter 11 protection during the pandemic, including J. Crew, Neiman Marcus and J.C. Penney, rocking an already struggling sector. Many U.S. shopping malls, particularly lower- and mid-tier ones, have struggled for years to combat falling occupancy rates and foot traffic. But in the current climate, mall operators face even more uncertainty as retailers close stores and pull out of leases.
Many mall leases come with "co-tenancy" clauses that allow retailers to pay lower rates or pull out completely if vacancies pass a certain threshold. A handful of store closures, analysts say, can quickly lead entire mall corridors to go dark, leaving Simon with few choices during the pandemic.
"It's normally a sign of distress when you're having to invest in your tenants, but it's the least bad option right now," said Scott Crowe, chief investment strategist at CenterSquare Investment Management.
OUTLASTING THE COMPETITION
Simon's long-term strategy, he said, is to be the last major mall owner standing. There are currently about 1,000 shopping malls in the United States, but Crowe says he expects at least half -- if not two-thirds -- to close in coming years. By buying up iconic brands, Simon can ensure they continue to have a presence at its malls while pulling out of leases at competing shopping centers.
"You end up with assets that are still alive and kicking, while everyone else falls by the wayside -- and suddenly you're in an OK position compared to your rivals," Crowe said.
Acquiring J.C. Penney, analysts said, would go a step further by giving Simon access to billions of dollars of coveted real estate. The department store chain, which anchors about half of Simon's shopping malls, isn't much of a moneymaker -- it brings in just $114 in sales per square foot, compared with an average of nearly $700 per square foot across all of Simon's tenants -- but it owns as much as $3.6 billion in real estate, said Floris van Dijkum, an analyst for Compass Point. J.C. Penney declined to comment.
But van Dijkum warned of other risks outside of Simon's control, including the current recession, a long-term shift to online shopping, and a second wave of coronavirus-induced shutdowns. Other analysts said many of the brands that have recently filed for bankruptcy have had years worth of unresolved problems that Simon may not be able to fix.
"It's certainly in Simon's long-term interest to keep their tenants afloat," said Steve Dennis, a Dallas-based retail consultant and former executive at Neiman Marcus and Sears.