- Simon Property Group is suing Taubman Properties to back out of its $3.6 billion deal to acquire the mall company.
- It’s also suing Gap, its largest tenant, and Brooks Brothers for withholding rent.
- Here’s what analysts think the future holds for the biggest US mall REIT.
- Visit Business Insider’s homepage for more stories.
Brick-and-mortar retail has been reopening across the country, punctuated Monday morning by the reopening of non-essential retail stores in coronavirus hotspot New York City.
Even so, retailers and their landlords are looking to ride out a period where regulation, a shutdown of international tourism, and consumers’ fear about virus transmission and a second pandemic wave will likely keep retail foot traffic subdued for months.
In the midst of this, the largest US mall landlord, the Simon Property Group, has filed three major lawsuits: two to get paid rent from struggling retailers, and one to get out of a deal to buy a competitor.
In recent years, it’s also been on a streak to buy up struggling tenants to help keep it malls stable.
Simon’s first-quarter profits fell about 20%, and it’s laid off or furloughed workers while cutting exec salaries. CEO David Simon was optimistic on an earnings call in May that the company’s tenants and their customers were eager to reopen.
Outlook for Simon
The real estate investment trust (REIT) has sued Gap for $65.9 million and Brooks Brothers for $8.7 million in unpaid rent during the coronavirus closings. Meanwhile, it’s also looking to get out of a $3.6 billion acquisition of mall REIT Taubman Properties, saying the acquisition target took an outsized hit from the pandemic.
We spoke to retail experts and analysts about the future for the company as brick-and-mortar retail opens nationwide. They told us that Simon is not immune to the headwinds facing the mall sector, and that these lawsuits highlight some of the major challenges for the company — and malls in general.
However, they were clear that if any retail REIT can successfully operate shopping centers right now, it would be Simon because of its billions in dry powder and long track record of success.
“The challenges that malls have are still there,” Alexander Goldfarb, a managing director and senior research analyst for Piper Sandler, told Business Insider, highlighting how the coronavirus pandemic has exacerbated long-term secular changes to brick and mortal retail. “Simon is the only one positioned to win.”
Simon declined to speak with Business Insider for this story.
The Simon-Taubman deal collapse
Pre-pandemic, Simon had been on an expansion streak rare in the mall REIT world, using its relatively strong financial position to pick off smaller players as their share prices sank.
Its all-cash deal for fellow mall REIT Taubman was announced on February 10, just a month before the pandemic prompted a massive drop in US retail sales. Now, the prospects for Simon hinges on its ability to get out of — or at least renegotiate, that arrangement.
Since the deal was originally announced, mall REITs have plummeted. A June 10 note from Green Street Advisors projects that Taubman would likely trade at less than $14 a share without the deal bolstering its stock price, an 80% reduction from the original deal price. Before the deal was announced and the pandemic hit mall REIT equity hard, Taubman was trading at $34.28 at the close of market on February 7.
“Their move to say that they don’t want to make this acquisition strengthens their liquidity and leverage,” Ranjini Venkatesan, a senior analyst at Moody’s, told Business Insider.
Simon has roughly $4.5 billion in cash on hand, which would increase to $7 billion if the deal is cancelled, an industry-leading amount of dry powder. Still, the deal could still be forced through in various ways.
Legal experts have noted that it’s tricky to prove that a material adverse change should be the basis of breaking a deal — and that there’s not much encouraging legal precedent, especially for short-term hiccups that don’t post a drastic underlying change in the business itself.
A JPMorgan note from June 10 said that share prices after the deal cancellation was announced made it appear that “the market seems to be viewing the Simon press release as more of a ‘next step’ in re-pricing the transaction rather than a final nail in the coffin on the deal.”
The key will be if Simon is able to “compel a judge that Taubman is disproportionately affected,” Goldfarb from Piper Sandler, told Business Insider.
Plotting a way forward, Taubman or no Taubman
To be sure mall properties are not a monolithic asset class. Simon has whittled down its inventory to the highest-performing shopping centers and malls over the last few years, something analysts say will help it outperform other mall REITs.
In contrast, CBL Property Group, a mall REIT that Fitch Ratings said had a high concentration of not so high performing regional malls, posted a 27% rent collection rate in April. In the company’s most recent 10-K filing, the company said it had “substantial doubt about our ability to continue as a going concern within one year,” because the company failed to make an interest payment on June 1, and projects it will have similar problems over the next three quarters.
If the deal goes through, Simon takes on Taubman’s 27 property portfolio, which includes many enclosed malls that rely on tourist traffic, such as the Short Hills Mall in New Jersey.
Some of Simon’s own 200 plus properties are similarly indoor-enclosure focused, like Copley Place in Boston, but the company is also a leader in outdoor outlet centers, which customers may view as safer post-pandemic.
Still, outlet malls have their own drawbacks post-pandemic, as many are destinations that depend heavily on free-flowing travel of customers.
“A negative for Simon’s outlet malls is that a lot of them are dependent on tourist trade,” Craig Johnson, owner of retail consultant group Customer Growth Partners, told Business Insider.
In legal filings on June 18, Taubman said that pandemic-related “buyers remorse” is not enough reason to cancel the deal, and that Simon was aware of the pandemic’s potential effects when the deal was signed in February.
The company “clearly understood that the coronavirus and the deteriorating retail market would severely impact the shopping mall industry when they made their strategic judgment to acquire the Taubman Parties — despite the brewing pandemic — so as to achieve a long-term business objective they had held for many years,” Taubman’s filing argued.
The first hearings in the case are scheduled for Wednesday.
Buying tenants — or taking them to court
Mall REITs also need to keep retailers in their malls and continue collecting rent.
In the case of struggling mall staples, Simon has already shown it’s willing to simply buy them in Chapter 11. In February, Simon; retail operator Brookfield Property Partners; and the Authentic Brand Group acquired retailer Forever 21 for $81 million. Brookfield and Simon acquired Aeropostale in 2016.
The Wall Street Journal reported Tuesday that Simon and Brookfield were also exploring a bid to buy JCPenney, which filed for Chapter 11 bankruptcy in May. This strategy allows Simon to keep its mall business stable and prevents co-tenancy clauses in leases from creating a cascading wave of vacancies. JCPenney is Simon’s second-largest anchor tenant, and rents 5.6% of the company’s total US space.
But for tenants who aren’t bankrupt, Simon has been more litigious. The company is suing Gap, its largest tenant by number of stores for $65.9 million, after Gap publicly announced in April that it wouldn’t pay rent on shuttered stores. Simon filed suit against Brooks Brothers claiming nonpayment of $8.7 million in rent on Friday.
“It is important for the industry to hold the line and say a contract is a contract,” Haendel St. Juste, an analyst at Mizuho Securities, told Business Insider about the nonpayment lawsuits.
Simon has not disclosed how many tenants have paid rent during the coronavirus crisis, but rent collection rates in April have been as low as 26% for mall operator Macerich with the National Association of Real Estate Investment Trusts’ average for shopping center retail REITs in April at a 47.1%.
Read more:
- Lease obligations are ‘suffocating’ retailers — and a potential court fight over a Victoria’s Secret flagship NYC store highlights a wider battle between tenants and landlords
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- Meet the 4 dealmakers driving Blackstone’s $325 billion commercial real estate portfolio. They walked us through how they’re thinking about opportunities in the downturn.
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