- In leading a partnership to buy the bankrupt department store JCPenney, Simon Property Group's chief executive David Simon faces a make-or-break moment whether he can reinvent and restore his multi-billion-dollar mall business.
- Simon has for years reached beyond his core business, buying retailers that occupy his company's spaces and branching out into other areas like e-commerce in an effort to embrace change in the industry.
- As the mall king relies on more partners and increasingly collaborative relationships with tenants, some observers point to his winner-take-all mentality and legendary temper as potential sticking points.
- Business Insider spoke with more than a dozen people who know and have worked with Simon to learn more about the press-shy mogul and his efforts to turn around a moribund retail industry.
- Visit Business Insider's homepage for more stories.
A week before a $1.75 billion deal would be announced to buy JCPenney, a rescue of the 118-year-old retailer seemed to be slipping away behind closed doors.
"We would like to do it, but we're pushing too hard," one of the chief bidders, David Simon, chairman and CEO of the country's biggest mall owner, Simon Property Group, told his friend and business partner, Jamie Salter.
Salter is the CEO of Authentic Brands Group, which controls several well-known brands and has teamed up with Simon to buy up bankrupt mall staples including Forever 21 and Brooks Brothers.
Whether it was a bluff or genuine retreat, the group of lenders holding $5 billion of debt against the department-store chain capitulated.
"I think we just bought it," Salter recounted Simon telling him in a follow-up call.
Negotiations would continue, and Simon would flash another hallmark of his hard-bargaining style: his infamous temper.
"We've had a few screaming matches, including earlier today," a lawyer said in a Texas bankruptcy-court hearing.
Simon, in partnership with another large landlord, Brookfield Property Group, is now set to acquire JCPenney's brand and operations, including 550 stores it owns or leases. It's his largest push yet beyond owning malls into possessing the retail businesses that occupy them, a divide few owners have crossed.
Mounting a turnaround of JCPenney, which has eluded a string of CEOs and the hedge-fund billionaire Bill Ackman, will test Simon's ability to juggle conflicting roles and his strategy to reinvigorate a mall business threatened by a torrent of bad news from changing consumer habits, to the rise of e-commerce, and, in recent months, a global pandemic.
In the second quarter, just 57% of Simon Property Group's tenants paid rent and Simon told analysts he doubted he'd ever collect 20% of those unpaid millions.
Business Insider spoke with more than a dozen people who know and have worked with Simon to learn more about the press-shy mall king and his career make-or-break moment. They described a savvy, ultracompetitive CEO who so far has made prescient moves, steering his company into safer and forward-thinking investments as the US was reaching mall oversaturation.
But some also pointed to Simon's winner-take-all mentality and sharp elbows as a potential liability as he increasingly relies on partners and a more collaborative relationship with tenants.
Buying storied brands on the cheap
In buying JCPenney and other retailers, Simon has stressed that his company is snapping up storied brands at an opportune moment when their values have plummeted to just pennies on the dollar and that can be revived to reap big gains.
"There's an opportunity to make a lot of money with a relatively small investment, if they're efficiently managed and they produce merchandise that people want to buy," said Rick Sokolov, a senior executive at Simon Property Group who has long been one of Simon's closest colleagues and confidantes.
Simon, through a spokesman, declined to directly comment for this article.
One of the footnotes of the JCPenney's deal is that Simon Property Group will be plowing only $150 million of its own cash into the acquisition.
"That's peanuts for them," said Floris van Dijkum, an analyst at Compass Point Research & Trading, adding that the company has about $7.5 billion in cash and a trove of assets worth tens of billions of dollars.
Still, a failure with JCPenney could saddle Simon with a glut of space at a moment when it will be hard to fill as record numbers of stores have folded or cut their footprints. JCPenney has 67 locations in Simon's 207-property portfolio totaling millions of square feet.
"Is it going to receive far more focus and notice than our other investments? Absolutely," Sokolov told Business Insider. "If it works out, will more people know about it? Yes. If it fails, will more people know about it? Yes. We think it's going to be a great investment, but either way it will be something we're associated with going forward."
Teaming up to win
To help his firm reach beyond its core expertise, Simon has enlisted the help of experienced partners.
Simon Property Group created a 50-50 partnership with Authentic Brands it calls Sparc that the pair have used to buy Aeropostale, Forever 21, Lucky, and Brooks Brothers. Authentic Brand's CEO, Salter, told Business Insider he expects to be involved as an owner in the JCPenney purchase, either directly, or through the Sparc venture, and imagined JCPenney could serve as a channel to sell exclusive branded offerings from Sparc's stable of labels.
Last year, Simon also merged an e-commerce business he launched for tenants in his company's portfolio of outlet centers called ShopPremiumOutlets.com with Rue Gilt Groupe, an online seller of exclusive luxury goods owned by billionaire retail executive Michael Rubin. Simon paid $280 million to do the deal.
"David is a growth guy," Rubin said. "There are certain people you meet and they have really good businesses, but they're static. That's not who David is. He's a guy who sees around corners."
Investing in online commerce might seem antithetical to brick-and-mortar retailing, but Rubin described it as part of Simon's willingness to step beyond his turf.
"I would much rather disrupt myself than have someone else disrupt me," Rubin said. "David could have said, 'Hey, I hate e-commerce.'" Instead he took the position that if his outlet mall tenants are going to go online, why not create the marketplace for them and capture that value."
Rubin said he expects the pair's venture to reap $100 million in revenue next year.
The partnership with Rubin could give Simon resources to retool JCPenney's e-commerce operations and better align it with its portfolio of stores.
But Simon's growing portfolio of retailers and increasingly intertwined interests also raise tricky questions for his firm.
In a recent report, Salter claimed that his brands and those owned and operated by Sparc had been granted percentage rent deals for their stores in Simon Property Group-owned malls — a structure that allowed them to pay the landlord a share of their sales rather than a fixed amount.
During the pandemic, when store revenues dropped to virtually nothing, that arrangement protected the retailers, Salter said.
Some observers said that admission could prompt stores across Simon's portfolio to request similar treatment, a shift that would upend the traditional economics of the mall business.
"You don't think every national retail tenant saw that and is now saying 'you can't just give yourself those deals'?" a former Simon executive told Business Insider.
Sokolov brushed off that notion.
"Do tenants ask for it? Sure," Sokolov said. "I do not believe we have reached an inflection point."
Some past relationships have been rocky
If the mall business was to become more of a profit-sharing enterprise, it would incentivize landlords to take a greater and more collaborative interest in the performance of tenants. That would be a major shift for Simon, observers said, noting that his competitive and combative nature has strained relations with some of Simon Property Group's tenants.
"David always thinks tenants need him more than he needs them," a former Simon executive told Business Insider.
For instance, Simon has for years had a frosty relationship with the Gap, the sprawling apparel chain that is one of Simon Property Group's biggest tenants with 450 stores in Simon-owned properties. That rockiness was on display during the depths of the pandemic, when the companies traded lawsuits, with Gap suing first to seek rent relief and lease cancellations and Simon Property Group in turn demanding more than $100 million in unpaid rent.
A former Gap executive recounted the story of a meeting between Simon and the retailer's then-CEO Glenn Murphy in Murphy's San Francisco office sometime in 2009. The face to face was meant to thaw relations, but about 25 minutes into their conversation, Murphy stood up and walked out, leaving Simon speechless and fuming.
"David never kisses any tenant," the former Gap executive said.
The spokesman for Simon Property Group, Hugh Burns, said company executives remembered the incident and its outcome differently.
"The Simon team recalls Mr. Murphy leaving a dinner meeting to take a phone call, after which the parties continued the meeting. It had no impact and in fact Simon maintained a very productive relationship with Gap during Mr. Murphy's tenure," Burns said.
Murphy declined to comment.
Other retail executives expressed an appreciation and admiration of Simon's acumen.
"Is David smart and tough? Yes," said Richard Baker, the CEO of Hudson's Bay, which owns Saks Fifth Avenue, who is both a tenant and friend of Simon.
"But the level of detail and the understanding he has over his portfolio is unlike anyone else I have seen," Baker said, explaining that Simon's prickly nature comes with the territory for someone so astute. "He knows every clause in every lease in every single one of his properties."
Simon quickly put his mark on the family mall business
After graduating from Columbia Business School, in 1985, and spending five years on Wall Street, Simon joined his family's real-estate business.
Change in the mall business was something that Simon, who is now 59, embraced early on.
His father, Melvin Simon, who died in 2009 at age 82, and his uncle Herbert, Mel's brother, had spent decades building their firm, Melvin Simon & Associates, into one of the country's premier mall owners and developers. Along with a handful of other builders, they were key players in popularizing the mall as a place to congregate and shop.
In 1993, Simon led the company's initial public offering at a market cap of nearly $2 billion, what was then one of the largest IPOs of a real-estate firm. Two years later he took the mantle as CEO and set a different agenda, pulling back on the company's prolific construction pipeline and heightening its focus on quality.
"These mall developments never hit their projections, but the margins were so high in the 1980s and '90s you could get away with it," said Yaromir Steiner, a mall owner who knows Simon. "That changed with David. The margins were getting thinner, and he realized the risk of building new was too high versus purchasing known returns."
Simon steered the company to instead pursue acquisitions that would immediately boost its bottom line. It purchased DeBartolo Realty Corp in 1996 for $1.5 billion and Corporate Property Investors in 1998 for $4.8 billion, picking up two of the best-performing shopping centers in the latter deal: Long Island's Roosevelt Field and Walt Whitman malls.
Multibillion-dollar deals would continue for the next decade with the purchase of Chelsea Property Group for $3.5 billion in 2004 and Mills Corp for $1.6 billion in 2007. In 2009 Simon bought Prime Outlets for $2.2 billion, giving it a total of 323 malls and other retail centers, a portfolio that made it by far the largest retail owner in the US.
Simon's position in the market gave him an upper hand with tenants
The years of steady acquisitions helped boost Simon's profitability, not just from marquee properties it picked up but through the leverage it could increasingly exert over tenants. Because it owned so many top-notch locations that major retail chains couldn't afford to overlook, it could force those brands to take space in lesser malls it owned as a condition of being allowed entry to its best properties.
"They had owned a bunch of schlocky stuff in the Midwest and Texas before David," said the former Gap retail executive who worked across the table from Simon on deals. "They leveraged the good malls they bought to get tenants into their bad malls better than anyone else in the business."
Even as Simon Property Group was on a roll, coasting to a massive $71.5 billion market cap in 2016, a valuation that made it one of the largest ever public real-estate companies, there were signs that Simon was bracing for headwinds.
In 2014, the company spun off a portfolio of nearly 100 lesser mall properties into a new REIT called Washington Prime Group, a move that anticipated a growing divide between the fortunes of choice properties and those in secondary locations.
Washington Prime's stock has nosedived since, tanking from a high of over $20 a share shortly after the IPO to as low at $0.56 earlier this year.
Simon Property Group has fared better, although it too has taken a substantial hit. Its stock has dropped from over $150 a share a year ago into the $60s in recent weeks, a decline that has wiped out tens of billions of dollars of the company's value. During the depths of the pandemic, its shares fell as low as $42.25.
Some analysts have suggested that pessimism toward the company is overblown. Van Dijkum, the analyst at Compass Point, described Simon malls as islands of sales productivity where retailers routinely average $700 a square foot in annual revenue, 40% higher than peer Class A malls. Top tenants in the company's portfolio, like Apple and Tesla, can reap over $3,000 a foot.
A shakeout in the mall industry could actually help Simon. The investment bank Cowen estimated in a report that nearly 400 of the country's roughly 1,000 malls could close by 2025, a die-off that will weed out lesser competitors that siphon away business.
"There's a lot of the noise in the world with some saying that malls are a disaster, but few are categorizing the huge difference between A and B properties," Hudson's Bay's CEO Baker said. "The best are going to be just fine."
From this perspective, even the company's planned $3.6 billion acquisition of a majority stake in Taubman Properties, a much smaller, rival mall owner, could have a rationale. The deal, which was announced in February, would consolidate Simon's hold on leading properties, including the coveted Beverly Center in Los Angeles and Cherry Creek mall in Denver — centers that observers say are better positioned to regain their financial footing after the pandemic.
Simon Property Group launched a lawsuit in June, claiming the pandemic should give it grounds to void the deal. The litigation is ongoing.
Some observers view that court battle as a bare-knuckled attempt by Simon to restructure the terms of the deal to be more favorable.
"We see Simon going through with the purchase of Taubman, but for a 20% discount," van Dijkum said.
A desire to win at all costs
Another challenge for Simon, according to former insiders, is the way the flagging retail real-estate business, combined with his grinding style and legendary temper, have taken a toll on the company's morale and talent pool.
"David can be the most unbelievably charming guy," the recent former Simon executive said. "But then, without question, he can be unhinged. When he yells, it's something like you have never heard or seen.
"You can hear him from floors away."
Others recounted the way Simon could fly off the handle over seemingly small details or transgressions and how his rage could quickly boil over from business to personal disparagement.
The other former Simon executive recounted a roughly 50-person quarterly leasing meeting in 2008 at Simon Property Group's Indianapolis headquarters where Simon grew so frustrated with a particular executive's presentation that he called the man, who was overweight, a "fat f—." The person remembered how a shocked and uneasy silence fell over the room as the executive hung his head.
The spokesman for Simon Property Group, Burns, said that the company denied the incident took place.
In the mid-'90s, the former Gap real-estate executive remembered playing golf with Simon in Columbus, Ohio, during a two-day trip Simon had arranged to meet with executives from L Brands, then known as The Limited, the owner of mall staples including Abercrombie & Fitch, Victoria's Secret, and Bath and Body Works.
On the first tee, Simon asked the group's caddie if he should use his driver. The teenage caddie gave him the OK, and Simon proceeded to launch a 300-yard shot clean past the hole and into the rough, demonstrating power that can be expected of few amateur golfers.
"He berated that caddy for 18 holes. I was embarrassed," the former Gap executive remembered. "He was just merciless to this little guy."
Burns said the company denied this incident as well.
The former Simon Property Group executives pointed to a string of high-level departures as evidence that Simon's histrionics were beginning to wear thin, especially as a key part of many execs' pay — the company's shares — tumbled in value.
"Simon has a terrible temper, and a lot of people at the top level of the company ultimately said 'I'm going to go do other things,'" the former Simon C-suite executive said. "You draw your own conclusions."
Among the recent exits is Stephen Sterrett, the company's former CFO, who retired in 2014; David Contis, the former president of Simon Property Group's mall division, who left in 2017; the president of Simon's Mills centers Gregg Goodman, who left in 2018; and Stephen Yalof, the former head of Simon Property Group's outlet mall business, who left earlier this year to take over as CEO of rival outlet operator Tanger Outlets.
Burns disputed that anyone had left because they were dissatisfied with the company or its chief executive's behavior or leadership, describing the departures as natural turnover and pointing out the fact that many executives had been with the company for decades.
For some, Simon's competitive edge is part of the appeal.
Shaquille O'Neal described Simon as the kind of executive he wanted to do business with. O'Neal is a shareholder in Authentic Brands and in recent years developed a big-and-tall men's suiting line at JCPenney, meaning the 15-time NBA all-star stands to gain from both Simon's bailout of the chain and Authentic Brands' potential involvement.
"David likes to win, and I like that about him," O'Neal said. "When I step on the court, it's all about winning, and David is someone who has similar determination. He keeps the game interesting."
O'Neal said he was "relieved" when he learned Simon was planning to buy JCPenney.
"You got a guy who owns a major property group, plays golf, is very competitive, and loves to win — and he listens to rap music," O'Neal said. "That's my type of guy."
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