A new approach
By: J. David Chapman/September 17, 2020
What is happening to convince real estate investors that they should invest in failing retail businesses? All I can say is desperate times create desperate solutions. Recently, J.C. Penney released details of a deal that would save the closure of its stores and put off a necessary liquidation of assets. The solution is a unique sale to mall-owners Simon Property Group and Brookfield Property Partners. You may recognize these real estate investment firms because Brookfield Property Partners owns Quail Springs Mall and Simon owns Penn Square Mall, both in OKC. Both of these malls have J.C. Penney as an anchor tenant. I have written in the past of the importance of anchor tenants to the survival of malls – well, here’s your proof.
J.C. Penney filed for Chapter 11 bankruptcy protection in May after the pandemic shut down almost all its stores and accelerated the retailer’s profitability problems. Simon and Brookfield will pay about $300 million in cash and assume $500 million in debt to buy the retailer. From a real estate standpoint, the most interesting part is that the agreement proposes to set up a separate real estate investment trust and a property holding company, which will include 161 of the company’s real estate assets and all of its owned distribution centers.
Simon and Brookfield partnered with Authentic Brands Group to purchase struggling Aeropostale in 2016 and teamed up again in February of 2020 to purchase Forever 21. It would not be surprising to see ABG also partner in the J.C. Penney transaction. The strategy that this group is utilizing is sometimes called a “stalking-horse bid” where a third-party buyer tests the market for a debtor for the assets of the bankrupt company.
J.C. Penney’s strategy to close more than 150 of its 800-plus stores might be what is necessary to keep the brand operating; however, this is not what is best for Simon and Brookfield at this critical junction for their malls. These anchor store locations are significantly more difficult to fill and absolutely necessary to keep other retailers located in the mall in business. The pattern in filling these big anchor tenant locations has been to attract gyms or hotels. It may turn out that a pandemic is not the right time to recruit either a hotel or gym, so you must keep the retailer anchor, even if it means purchasing its stores.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).