Retail

The biggest US mall owner is doubling down on retail even as the industry struggles

Key Points
  • Simon is buying apparel retailer Forever 21 and mall owner Taubman.
  • It has a strong balance sheet to make such bets.
  • Simon is doubling down on its thesis that the best malls in America will survive, and with Forever 21, it hopes to keep the bankrupted company in business.
Shoppers walk through the King of Prussia mall in King of Prussia, Pennsylvania.
Jennah Moon | Bloomberg | Getty Images

Simon Property Group is on a buying spree as America's mall operators grapple with declining foot traffic and some struggle to keep their doors open.

The biggest mall owner in the U.S. is close to wrapping up an $81 million deal to rescue teen apparel retailer Forever 21 out of bankruptcy court, the same week it announced its plans to acquire rival mall owner Taubman in a deal valued at $3.6 billion.

With Taubman, Simon is doubling down on its thesis that the best and most profitable malls in America will survive, analysts say. And in buying Forever 21, Simon is proving it has the strong balance sheet to make a risky bet or two. As of Dec. 31, Simon had over $7.1 billion of liquidity, including cash on hand.

"We have zigged when others have zagged," Simon CEO David Simon told analysts during a call earlier this month.

The news comes as America's mall owners are faced with some of the most pressure they have ever seen, with retail store closures mounting and bankruptcies rising as more consumers shop online from their couches. Investors fear that as store closures pile up, the real estate owners won't be able to fill spaces quickly enough, losing out on rent income.

Macerich shares are down nearly 48% from a year ago, Washington Prime Group shares are down almost 50%, and CBL's stock has tanked 68%.

Simon shares are down about 24% over the past 12 months. The real estate owner has a market cap of about $44.8 billion.

The Forever 21 deal

Simon — in a group that includes U.S. mall owner Brookfield Property Partners and Barneys owner Authentic Brands Group — has made an $81 million, stalking-horse bid to rescue Forever 21, which filed for bankruptcy last September. Forever 21 said this past Sunday that it was canceling a planned auction, after no other bidders emerged, inching Simon's plan one step closer to approval. A successful bid, among other things, would allow Simon to keep its Forever 21 stores open.

Forever 21 still faces its own struggles, which Simon, with the help of Brookfield and Authentic Brands, will be tasked with fixing. The apparel retailer's sales started to slump as the business expanded too rapidly overseas, sparking supply-chain complications. It faces heightened competition from other fast-fashion retailers such as Zara, H&M and Uniqlo.

Simon has good incentive to solve the problems: It is one of Forever 21's largest landlords, with 98 Forever 21 stores at its malls and outlet centers.

It has bought a retailer before. In 2016, Simon was part of a group that put up $243 million to save tween and teen apparel retailer Aeropostale from bankruptcy court. "When you look at Aero, they have been able to turn that around," said Alexander Goldfarb, Sandler O'Neill & Partners managing director and senior REIT analyst. "I see no reason why Forever 21 doesn't work."

Simon has since 2016 told analysts that it invested about $25 million in Aeropostale and has received about $13 million back. It grew Aeropostale's earnings before interest, taxes, depreciation and amortization to $80 million from a loss of $100 million three years ago.

"Our group's successful turnaround at Aero ... gives us confidence with our ability to do the same with Forever 21," CEO Simon said on an earnings call earlier this month. "Forever 21 is a storied and widely recognized brand with over $2 billion in global sales. We believe Forever 21, similar to Aero, presents a very interesting re-positioning opportunity."

More malls for Simon

The Taubman deal shows how Simon is betting on top-tier malls, which are performing better than their lower-tier counterparts.

Simon announced Monday that it agreed to buy Taubman, which runs about two dozen high-end properties — including Beverly Center in Los Angeles and The Mall at Short Hills in Short Hills, New Jersey — for a price tag of $3.6 billion. Taubman also has 21 Forever 21 stores, court filings show.

"It made all the economic sense in the world for Simon to buy Taubman," said Vince Tibone, a lead retail analyst at commercial real estate services firm Green Street Advisors. Similar to Simon's proposal to buy Forever 21 being a steal, he said, this is going to be done at a "fair price," especially given the sell-off over the past year in Taubman shares.

Simon will still have "the best balance sheet in the mall sector," Tibone added.

Simon said for Taubman it would be paying $52.50 a share, or a 51% premium to where Taubman shares closed Feb. 7, the last trading day before the deal was announced Feb. 10.

Simon had previously tried to buy Taubman as well as mall owner Macerich.

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