
Simon Property Group's Las Vegas North Premium Outlets. Retail industry observers say the mall landlord and others of its ilk can be better stewards of their retailer tenants than private equity.
Before the "retail apocalypse" that has shuttered innumerable storefronts in recent years fully exhausts itself, mall landlords will likely buy out some more big names from their tenant rosters, market observers say.
The Simon Property Group Inc.-led consortium's 2016 acquisition of the teen apparel company Aeropostale Inc. was novel at the time — real estate investment trusts historically have not been buyers of troubled tenants that do not own real estate — but the mall landlord's success with that deal will likely precipitate others in the coming months, as debt-laden retailers seek relief in a still-challenging environment that requires more and more capital to refurbish storefronts and enhance consumer experiences.
Analysts say top-tier mall landlords can do a better job shepherding retailers through the industry's ongoing changes than private owners, who have tended to prioritize cost savings and short-term financial gains over the long-term health of retailers' business.
"They [mall REITs] can see what's happening out there, and they've got folks that are probably much better trained than Wall Street, and much better trained than most of private equity, to understand what's going on in retail and what needs to change," Alex Arnold, an analyst at Odeon Capital Group who covers both retailers and mall REITs, said in an interview.
Deals like Simon Property Group's Aeropostale play, which saved hundreds of storefronts from closing and boosted the target's profitability, make sense on their own terms. The retailer, saddled with debt but otherwise operationally healthy, receives a cash infusion, and the landlord obtains a seat at the table to shape, either through in-house talent or a skilled partner, real estate and store curation strategy. Both parties benefit by prioritizing the long-term health of the shopping center.
"There are private equity guys that can do this, but given what's going on in terms of volatility and failure in retailing, there's a shorter and shorter list of private equity guys that want to get involved here," Arnold said. "And the skill set of Simon ... they've been doing this for decades."
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On Simon Property Group's second quarter earnings call in July, CEO David Simon said it is "very possible" the company will make additional investments like its Aeropostale purchase, both in traditional retail segments and in tangential concepts that are increasingly common "experiential" replacements for downsizing department stores. Earlier in the summer, Simon Property Group, through a wholly owned subsidiary, became a shareholder in Allied Esports via an investment in Black Ridge Acquisition Corp., as part of an effort to build out "dedicated esports venues and experiences" at its U.S. shopping centers.
"We're certainly as good as the private equity guys when it comes to retail investment," Simon said.
Haendel St. Juste, analyst at Mizuho Securities USA, put Simon Property Group at the head of only a small cadre of landlords capable of pulling off such deals in current market conditions. "Looking at the landscape, and thinking about their balance sheet, and thinking about their track record, would I be surprised if they did another one or two?" he said of Simon Property Group's retailer investments. "No."
St. Juste said Macerich Co.'s and Taubman Centers Inc.'s smaller market capitalization, relatively high leverage, and redevelopment and other capex needs, make them unlikely acquirers. But he named Brookfield Property Partners LP and Unibail-Rodamco-Westfield as potential players. The companies did not respond to requests for comment on the matter.
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In an interview, Garrick Brown, vice president of retail intelligence for the Americas at Cushman & Wakefield, estimated the market will see five or six big takeouts in the next few months, as the retail bloodletting continues. Cushman & Wakefield is forecasting 13,000 major chain closures in 2019, and that figure, as of September, has already reached roughly 9,000, the firm's initial forecast for the year. Such closures hit 5,000 in 2010, the worst post-recession year.
Brown said apparel and department stores will likely be a focus given the significant discounts in those segments. He added that a retailer would not need to have reached bankruptcy to be seen as an attractive investment opportunity.
"There are a lot of chains that are currently on bankruptcy watch lists that have great brand awareness, that have very loyal customer bases [and] most of their problems have to do with debt," he said. "Those are all potential targets, depending on the nature of that debt."
Brown said mall owners in many cases would make superior owners because they prioritize long-term operational health over operational synergies, or cost savings, and see a retailer as more than a mere real estate play or financial instrument. However, it is unclear how many attractive retailers will be available at compelling prices, he said.
"Frankly I think there's a lot of brands out there that would prosper more in the hands of some of the savvier mall owners," he said, "because they have a built-in imperative beyond the investment itself to make sure the retail experience works."



