Real-estate titan David Simon explains why the US' largest mall operator has been buying up bankrupt retailers like JCPenney and Brooks Brothers

  • Simon Property Group has been buying up bankrupt brands through partnerships with Authentic Brands Group and Brookfield Asset Management. 
  • In the mall operator's earnings call on Monday, CEO David Simon said the decisions come down to the company's belief in the strength of a brand. The joint bid between Simon Property Group and Brookfield for JCPenney's retail operations was approved in bankruptcy court on Monday evening.
  • "We believe in the Penney's brand," Simon said in the earnings call. "We believe we can return the company to increasing sales." 
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Simon Property Group, the largest mall operator in the US, is branching out beyond collecting rent from its tenants and into brand ownership.

The company has snatched up a number of retail chains this year, teaming up with brand management company Authentic Brands Group to buy both Brooks Brothers and Lucky Brand out of bankruptcy. The joint venture between both companies is called Sparc.

Meanwhile, Simon Property Group has also partnered with Brookfield Asset Management, which, like Simon, owns and operates a number of malls in the US, to acquire JCPenney's retail and operating assets. That purchase was approved in bankruptcy court late Monday evening after JCPenney filed for Chapter 11 bankruptcy protection in May. 

Read more: Real-estate titan David Simon is reshaping America's malls. Insiders reveal how he's facing a make-or-break moment with a $2 billion bet on troubled JCPenney.

During Simon Property Group's quarterly earnings call on Monday, CEO and President David Simon detailed the company's thinking behind the JCPenney acquisition. 

"We believe in the Penney's brand. The company did over $9 billion in sales pre-COVID. We believe we can return the company to increasing sales," Simon said. "This customer is important to the community, as is JCPenney, and to us, and we expect we will continue to grow this customer over time, and we're extremely proud to serve the community in that capacity." 

Simon Property Group and Brookfield will have their work cut out for them. Even before the COVID-19 pandemic forced nonessential retailers to close all of their stores for several weeks, JCPenney had endured years of slumping sales. Since the bankruptcy filing, more than 150 JCPenney stores have been slated to close.

Simon Property Group and Brookfield are taking on JCPenney's reduced retail operations for $1.75 billion using a combination of cash and new term loan debt. JCPenney's lenders will own 160 of its stores and all of its distribution centers in separate holding companies. 

Simon said a priority for JCPenney will be improving the mix of merchandise, including potentially by increasing representation of brands that are owned by ABG, which the CEO said is partnering with Simon and Brookfield in their takeover of the department store. 

"We do think that the combination of our relationships with a direct-to-consumer crowd, as well as all the brands that either we control or that ABG does, that those products will find a home in Penney," Simon said. "And there's a lot of intense discussions going on."

'Buying things cheap'

Simon Property Group is expecting its partnership with ABG to eventually be a highly profitable area of its business. In addition to Brooks Brothers and Lucky Brand, the venture added Nautica and Aéropostale to its portfolio before the pandemic. Sparc also owns a 75% stake in Forever 21 and a majority share in Volcolm. 

"We know the brands. We do a lot of research. ABG has been a very good partner. They know how to blow out the license aspect of it, which we're a partner in," Simon said on the earnings call.

He cited Brooks Brothers as an example, saying that the companies do not underestimate "buying things cheap." ABG and Sparc paid $325 million for Brooks Brothers in August and agreed to keep at least 125 stores operating. 

Simon said that although Brooks Brothers has a "great following," "it had the strangest real estate portfolio." Some locations, he said, were paying far too much in rent. 

"We get out of bad stores. We buy the inventory at a discount," Simon said. "We right-size the overhead and … with better business judgment and lo and behold, you suddenly have a business that's got positive — significant positive — EBITDA and you haven't paid much for it."

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