Simon, the Biggest U.S. Mall Owner, Shows Two Sides: Innovator and Traditionalist
August 18 2020 - 5:31PM
Dow Jones News
By Esther Fung
Mall owner Simon Property Group is pursuing an unorthodox
business strategy, smashing the foundation of the traditional
industry model on the one hand while trying to glue certain
elements of it back together with the other.
Simon has been in talks with Amazon.com Inc. to convert
department stores into warehouse distribution hubs, say people
familiar with the matter, an innovation that could plug large holes
filled by ailing tenants such as Sears Holdings Corp. and J.C.
Penney Co. But the move would challenge a long-held industry belief
that anchor tenants are crucial for attracting foot traffic to
other stores.
At the same time, Simon has been trying to keep aspects of the
old business model intact, despite heightened pressure from
e-commerce and other forces that have pushed some once-prominent
retailers into bankruptcy. It is using cash to help stabilize some
companies whose demise would mean closing stores in Simon
malls.
The mall operator and a partner recently agreed to buy apparel
retailers Brooks Brothers Inc. and Lucky Brand Dungarees LLC out of
chapter 11. With another partner, Simon is in advanced talks to buy
J.C. Penney.
One thing the two strategies have in common: a focus on buoying
occupancy levels at Simon malls. Analysts say there is still a glut
of malls, and that as many as half of the roughly 1,100 U.S. malls
could shut for good as retail tenants close their doors.
Some view Simon's moves as boosting the company's income while
buying time to reconfigure malls with only one anchor department
store.
"Nobody in the $5.5 trillion-a-year retail business stands to
lose more from bankrupt tenants or declining tenants than Simon
Property right now, " said Nick Egelanian, president of SiteWorks,
a retail consulting firm. "They need to keep rents flowing. I see
it as the natural conclusion of the 50-year run of the mall
industry."
Some investors said they think Simon Property is being astute
and making out-of-favor investments that might seem foolhardy now
but could pay off in the long term. Shares of the largest U.S. mall
owner by number of malls are down 4.8% since June 30, when news
started to emerge that it was interested in buying more flagging
retailers. The S&P 500 rose around 9.3% during the same
period.
Bill Smead, chief investment officer of Smead Capital
Management, recently increased its investment in Simon Property
Group to around 2.3% of its portfolio. He used an analogy to
suggest it makes sense for Simon to pursue out-of-favor retailers
right now because they come at bargain prices but could offer an
upside when the economy turns.
"You buy straw hats in the winter. And for retail, this is
winter," Mr. Smead said.
During an earnings call last week, Simon Property Chief
Executive David Simon addressed concerns about the higher frequency
of retailer investments. He said the company's aggregate investment
in the two retailers is very small, just less than $50 million, and
that ratings firms wouldn't think twice about it.
"If we didn't believe in the brand and we didn't think we could
make money, we wouldn't do it. And it's...probably the same people
that told Amazon to stay just in the book business, OK?" said Mr.
Simon. "There's just nothing out there that says you can't make
smart investments outside of your core businesses."
As part of a consortium, Simon purchased apparel retailer
AĆ©ropostale Inc. out of bankruptcy in 2016. The mall operator said
in February it invested $25 million in the retailer and has
received $13 million in distributions, and that AĆ©ropostale
earnings have reached around $80 million from a loss of $100
million three years ago. Simon also purchased Forever 21 Inc. with
some partners early this year.
Still, some analysts said that in one sense Simon Property has
been restrained. The landlord has made attempts for only three out
of the 26 retailers to have filed for bankruptcy so far this year.
"They're not going after everyone," said Alexander Goldfarb, a
senior research analyst at Piper Sandler Cos.
Mr. Simon declined to comment about any logistics partnership
with Amazon on the call, but he noted that more retailers are
distributing their e-commerce orders from their stores through
curbside pickup. "That's a good trend long-term for us," said Mr.
Simon.
The discussions with Amazon over converting some department
stores into fulfillment centers are still in preliminary stages and
a variety of uses are being considered, including a hybrid of
retail and warehouses, according to a person familiar with the
matter.
Simon risks alienating other mall tenants that would prefer a
traditional anchor, rather than their chief online competitor. But
if Amazon could include a retail-store portion such as a bookstore,
a cashierless convenience store and returns drop-off, it would be
additive to mall traffic that other mall tenants would appreciate,
analysts from Jefferies Research said.
Write to Esther Fung at esther.fung@wsj.com
(END) Dow Jones Newswires
August 18, 2020 17:16 ET (21:16 GMT)
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