It’s said that someone who represents himself in court has a fool for a client. What about a landlord who owns their tenants? That’s what we’re going to find out, as Simon Property Group (NYSE:SPG), the largest operator of shopping malls, continues to buy bankrupt retailers. Over the last few years, the company behind SPG stock bought Aeropostale, Forever 21, Brooks Brothers and Lucky. Along with Brookfield Asset Management (NYSE:BAM), it added JCPenney.
The landlord isn’t going to be standing outside the shop. Management will be done by Authentic Brands Group, whose majority owner is Blackrock (NYSE:BLK), according to Wikipedia. Authentic owns dozens of stores, and rights to celebrities like Muhammad Ali and Marilyn Monroe. Authentic even has a slice of Papa John’s (NASDAQ:PZZA) board member Shaquille O’Neal.
Is this genius? Or a fool’s errand? Simon’s stock price has been cut in half this year.
Simon Says Genius
Simon CEO David Simon insists the move is genius.
At the company’s annual meeting in August, Simon said the merchandise was bought at less than its wholesale value. He said thousands of jobs were saved and the company will recoup its investment within a year.
If Simon didn’t act, it might not have a business. He said the company collected only half the rent it was owed in May. It was up to three-quarters by summer. But the hit to earnings is substantial.
For the quarter ending Sept. 30, Simon earned $146 million, 48 cents per share, on revenue of $1.06 billion. For the same quarter in 2019 it earned $544 million, $1.77 per share, on revenue of $1.41 billion. For the December quarter, analysts are expecting earnings of $2.34 per share on revenue of $1.15 billion.
While Simon is still making money, other mall owners are going broke. CBL & Associates (OTCMKTS:CBLAQ) and the Pennsylvania Real Estate Investment Trust (NYSE:PEI) both filed for bankruptcy at the start of November. CBL owns 100 malls in the Southeast and Midwest. PEI did a pre-packaged bankruptcy that added $150 million in funding.
Authentic Lifeline for SPG Stock or Boat Anchor?
What looks like a lifeline could prove a boat anchor if Authentic can’t make the stores work.
Authentic is partnering with Bolt, a fintech startup, to improve the stores’ e-commerce game with single-click checkout. It’s finding design partners for brands like Juicy Couture. It’s sub-licensing brands like Forever 21 in new markets like Latin America. When it can’t make things work, as with Lucky Brands dungarees, it liquidates the business.
The risks are bigger with JCPenney. Here Authentic only has a “minor” role. Simon and Brookfield are the main players. Penney also anchors many of the partners’ malls. While launching Black Friday sales, and claiming to protect 60,000 jobs, the new owners already raided the pension plan.
The Bottom Line
What Simon is doing will work in the near term.
But the long term comes next year when new inventory must be bought and turned over.
I could find nothing in the latest Authentic Brands moves that bring people into stores. Many of the stores, like Brooks Brothers, are being treated by local media as though they’re going out of business.
Even if mall shopping returns to “normal,” mall revenue is down by nearly half from 2000. There are analysts who insist it was debt that sank many of the tenants and strong brands will reach “the other side.”
But Simon Properties is a real estate investment trust. You don’t buy a REIT as a speculation. You buy it for income. Is the current 6.9% yield on Simon stock sustainable? Simon is no longer for the faint-hearted.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn.