By Esther Fung
Analysts are split about whether Simon Property Group Inc.'s bid to rescue a distressed fast-fashion retailer will succeed, but even skeptics say the mall giant may have little choice but to salvage one of its most important tenants.
Simon Property, Brookfield Property Partners LP and Authentic Brands Group LLC made an $81 million bid for Forever 21 Inc. last week. The retailer now says it will go ahead after no rival bids emerged.
Simon Property counted 98 Forever 21 stores occupying 1.5 million square feet in its U.S. portfolio at the end of the third quarter, filings show. That made it the landlord's seventh-biggest tenant in terms of one rent metric, the percentage of total base minimum rent, though Forever 21 dropped to 12th in the fourth quarter after the landlord reduced rent.
Simon Property said Monday it was also buying rival mall owner Taubman Centers Inc. in a $3.6 billion cash transaction. Simon Property's share price rose 1.5%, or $2.04, to $143.06 at Monday's close.
The Taubman acquisition is a high-stakes move, showing how Simon Property would use its strong cash flow and balance sheet to expand when many peers are in retreat.
The stakes are high with Forever 21, too. Simon Property would come under increasing pressure if Forever 21 shutters all its stores. The retailer's stores typically exceed 10,000 square feet, as much as five times the space as the specialty stores around it. That footprint makes it more difficult for owners to find a replacement for Forever 21. Without another occupant, other tenants could demand rent reductions or even terminate their leases if their contracts have certain clauses tied to vacancy rates.
"They are fighting to keep mall operations intact in order to mitigate the domino effect of multiple retailers exercising kick-out rights as the occupancy rates decrease," said Nina Kampler, a consultant who works with retailers on restructuring store leases. "Why else would they be acquiring retail businesses now?"
Even if Simon Property and its partners stabilize Forever 21, there is no guarantee of longer-term success. A number of retailers have emerged from bankruptcy only to file for chapter 11 a second time, including Payless ShoeSource Inc., Gymboree and Charming Charlie.
Proponents of Simon Property's effort with Forever 21 say that a similar move worked before. In 2016, a consortium that included Simon Property invested $243 million to salvage teen apparel retailer Aéropostale Inc. in 2016.
Simon Property invested about $25 million in Aéropostale and has received $13 million back in distributions. Now Aéropostale's expected earnings before interest, taxes, depreciation and amortization is around $80 million, a turnaround from negative $100 million at the time of the acquisition, Simon Property Chief Executive David Simon said on an earnings call last week.
With more than 500 stores in operation, he estimated Aéropostale to be worth $350 million.
Mr. Simon said on the call that Forever 21 is a widely recognized brand with $2 billion in global sales. The consortium plans to continue operating its stores and e-commerce business, and aims to improve product sourcing.
"We're going to hopefully turn around Forever 21 and make money," he added.
Brookfield declined to comment, and Authentic didn't respond to requests for comment.
Mr. Simon said that Forever 21 became distracted by international expansion and the creation of another brand and that its stores have gotten too big. Getting Forever 21 back in the black will be "a little more complicated and a little bigger" than Aéropostale, he said.
Forever 21's larger revenue base, complex supply chain and portfolio that includes a broad range of store formats would make a turnaround slower, said Linda Tsai, senior analyst at Jefferies.
"That said, Simon's financial backing and [Authentic Brands Group's] operational know-how can help return profitability to this business," she added.
Other Simon Property investments have also worked out. The firm has said its acquisition of real estate owner Mills Corp. and a stake in Paris-based mall owner Klépierre SA have been profitable. The landlord's recent investments in fitness, entertainment, e-commerce and a brand management company have helped diversify the company and reduce its risk from potentially weaker rent payments.
But some investors say such investments make the landlord's business more complicated and harder to assess.
"I am forced to make certain assumptions about 'other income,'" said Matthew Werner, managing director at Chilton Capital Management LLC, which has been an investor in Simon Property since 2005. "It's another level of trust he is asking for."
Write to Esther Fung at email@example.com