Thursday, February 20, 2020

Malls: Getting Near The Edge?

In the past two weeks, three remarkable events took place in the mall industry. On February 5th, Macy’s announced that it will close 125 stores over the next three years which represent approximately one-fifth of its more than 600 stores. The initial round of 31 store closings is expected to take place early this year. Furthermore, a new location strategy was announced which will focus on smaller stores in off-mall environments, not exactly music to the ears of regional mall owners. 

The second and third major happenings occurred a week later and both involved Simon Property Group. Simon, along with Brookfield Property Partners and Authentic Brands Group, was announced as the stalking horse that has now made a successful $81 million bid for the once formidable, but now distressed, fast-fashion retailer Forever 21. In years past this might have been regarded as an opportunistic acquisition priced at pennies on the dollar. Today it more closely resembles a desperate attempt to hold mall vacancy in check and avoiding further occupancy fallout resulting from co-tenancy and kick-out clauses, or at least to avoid rent reduction demands from the affected remaining tenants. Simon is landlord to 98 Forever 21 stores, which typically average 40,000 square feet.

The last event was the announcement that Simon will purchase Taubman Centers, including 24 regional shopping centers. At a time when shoppers are walking away from malls, Simon will be acquiring a relatively upscale group of super-regional shopping centers that will complement Simon’s existing portfolio. Generally these malls are regarded as Class A quality, giving them more viability to survive the mall sector fallout that has accelerated in recent years. Taubman’s significant exposure to Forever 21 may have been just the clincher to get the deal done. This acquisition will give Simon full or partial ownership in approximately 254 properties worldwide.

If we take a closer look at what all this means to the mall sector in general, we can see that it means a lot. As Macy’s goes through the process of closing stores, more and more regional malls will be affected by the decline in foot traffic, which will inevitably result in more mall shop closings. Thus far, with a few exceptions, the bulk of these store closings will occur in secondary markets at Class B and C properties where Sears and JCPenney closings have already taken a toll and vacancy is high. But with another nearly 100 closings on the way, it is likely that some of the more prominent malls throughout the US will be impacted as well, including both Simon and Brookfield properties.


Regarding the Forever 21 acquisition, had Forever 21 ended up in bankruptcy, Simon and Brookfield would both have experienced large-format vacancies throughout their portfolios. In a move that paralleled their acquisition of Aeropostale in 2016, the mall owners also brought Authentic Brands in on the deal to run the business. As an expert on rebranding teetering retailers, Authentic Brands is viewed as a company that can revive the Forever 21 brand and present a new image among shoppers. However, apparel retailers are among those most impacted by current shopping trends, which leaves the long-term viability of Forever 21 and Aeropostale both in question.  While this adds plenty of risk to this Simon and Brookfield acquisition, the fact that these retail units will not go dark should at least give some protection to these owners.

Last on the list is the Taubman acquisition. This is a company that Simon first tried to acquire in 1992. It was an unwritten rule back then that family mall operators didn’t encroach on another’s territory, let alone make an attempt at a hostile acquisition; that offer was rejected, and so here we are today. While it may seem counterintuitive for anyone to want to acquire a regional mall portfolio, it does make sense in some respects. First, Taubman shopping centers generated mall shop productivity of $876 per square foot in 2019, the highest among mall sector REITs. Second, Simon has stated that the acquisition should be immediately accretive and with Taubman as the landlord to 21 Forever 21 locations, it should enhance the financial benefit somewhat. Simon, realizing that consolidation may be the only way to ensure survivability, may now shift its attention to Macerich, identified as another potential acquisition target with 31 Forever 21 leases under its belt, 

It can’t be ignored, however, that despite Simon’s best efforts, department store fallout may have much more to say about the eventual success or failure of these Simon acquisitions. Investors must be hoping Simon was right. 

Bob Sheehan
Vice President of Research
BSheehan@KeyPointPartners.com


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