SPG - Simon Property Group

[Spekulatius]

 

Mall owner Simon and Authentic Brands make $305 million bid for bankrupt Brooks Brothers, aiming to keep over 125 stores open

 

 

https://www.cnbc.com/2020/07/23/mall-owner-simon-and-authentic-brands-bid-305-million-for-brooks-brothers.html

 

A company known as Sparc LLC, which is comprised of the U.S. mall owner Simon Property Group and the apparel-licensing firm Authentic Brands Group, is making a $305 million bid for bankrupted Brooks Brothers.

 

The offer, still subject to better and higher bids and court approval, is to keep at least 125 of Brooks Brothers’ stores open for business.

 

Ascena has ~2800 stores and just went bankrupt too. There are plenty more opportunity for SPG to roll up the complete B&M retail sector.

[glorysk87]

LOL now going after Brooks Brothers. A personal favorite brand. Say what you will about the sector, but these guys definitely seem to be playing offense.

 

I'd also add, that while there are plenty of Pier 1's out there, the issue with a lot of these retailers isn't sales or profitability, its waayyyy tooo much debt, usually the result of being private equitied a few too many times.

 

They are not playing offense, they kick the cans down the road. A lot this retailers like Brooks won’t exist 10 years from now, but SPG can’t afford to have vacant spaces in their malls so they have to keep zombies alive.

 

The whole thesis that malls can become office spaces, experience Locations and Restaurant rows get covitzt. They are screwed, imo.

 

I think I will see the Roosevelt mall in LI getting gutted out in the next 20 years, just to name one example.

 

Not sure I follow this train of thought. SPG has worked with Authentic Brands Group in the past to acquire particular assets of bankrupt retailers. To me this is just smart management of the business. Take ownership of a bankrupt tenant, provide them with capital to reorganize and maintain operations - maintains occupancy and rent for SPG, and provides them with a very cheap option on the value of the brand (and Brooks Brothers is a high quality brand). More likely than not they'll see a nice gain on investment, similar to the play they ran with Aeropostale.

 

Also, it's not just SPG that does this...this is a pretty tried and true exercise for the REITs. Plenty of others have done the same. It's just smart business, especially for the minimal amount of capital they need to invest.

[Gregmal]

I posted in another thread some time ago but think its relevant here too.. but imagine if WEB invested based on narratives or where consensus about the stock price a week or quarter down the road would be?

 

 

WEB: Hey Charlie, what do you think about Amex here?

 

Charlie: Nah bro, its got problems. Fraud. probably going lower

 

WEB: Good point, Ill pass

 

 

 

WEB: Charlie, the S&L crisis seems to be taking even the best banks with it, but doesnt Wells look great here?

 

Charlie: Nah bro, banks are in trouble. You'll probably lose money on it this year...

 

WEB: Very true, pass

 

 

Goldman banker: Hey Warren, we need capital, name your terms. Whatever you want

 

WEB: No thanks. Scary times ahead of us. Did you see what happened to Lehman and Bear?

 

 

 

 

 

 

 

 

[petec]

propping shit up like BAM is doing?

 

Greg what are you referencing here?

[Gregmal]

propping shit up like BAM is doing?

 

Greg what are you referencing here?

 

The BPY tender offer.

[Gregmal]

https://shoppingcenterbusiness.com/parkway-kkr-complete-10-million-renovation-of-brickell-miami-office-tower-sign-three-retail-tenants/

 

Retail leases being signed in Miami? No way bro.

[petec]

propping shit up like BAM is doing?

 

Greg what are you referencing here?

 

The BPY tender offer.

 

Ah ok.

[Gregmal]

https://www.wsj.com/articles/amazon-and-giant-mall-operator-look-at-turning-sears-j-c-penney-stores-into-fulfillment-centers-11596992863?mod=hp_lead_pos1

 

Owning the dirt gives you plenty of options....looks like they may not even need to demo the whole mall to go the "industrial/warehouse" route.

[Spekulatius]

https://www.wsj.com/articles/amazon-and-giant-mall-operator-look-at-turning-sears-j-c-penney-stores-into-fulfillment-centers-11596992863?mod=hp_lead_pos1

 

Owning the dirt gives you plenty of options....looks like they may not even need to demo the whole mall to go the "industrial/warehouse" route.

 

How much can they charge /sqft renting part of the mall as warehouse? It’s a lesser use for sure. It also rounds counter network effects of a mall, if you rent out part of it for other purposes.

[Mephistopheles]

https://www.wsj.com/articles/amazon-and-giant-mall-operator-look-at-turning-sears-j-c-penney-stores-into-fulfillment-centers-11596992863?mod=hp_lead_pos1

 

Owning the dirt gives you plenty of options....looks like they may not even need to demo the whole mall to go the "industrial/warehouse" route.

 

How much can they charge /sqft renting part of the mall as warehouse? It’s a lesser use for sure. It also rounds counter network effects of a mall, if you rent out part of it for other purposes.

 

I'm sure they can't charge much but even for department stores they were never able to charge much. This is probably even better in that it is lower capex than dept stores. It does take away from the network effects to some degree if the mall is thought of in a traditional sense. But the mall of the future is mixed uses - gyms, restaurant, bars, entertainment, office/hotel (maybe not anytime soon).

 

I think the best value for the dirt is in that malls are strategically located near major highways which incidentally is exactly what you need for warehouses. Additionally thanks to NIMBYism, there might not be many other options in some communities. Not to mention lower construction costs since the plumbing, electric, walls, etc. are already there.

[Gregmal]

Not really. I'd guarantee theyre getting more than the $5 sq/ft Sears and JCP are currently paying. The future of any mall is not going to be 100% retail. As we continue to see, they have many, many different options here. Location is key. SPG has it.

 

EDIT: Further, if the thesis was that they'd get $5 a sq ft for their anchors and their anchors were all going out of business in the next 5 years....getting anything kind of debunks that and automatically improves the profile... These guys are world class operators.

[Gregmal]

https://www.wsj.com/articles/amazon-and-giant-mall-operator-look-at-turning-sears-j-c-penney-stores-into-fulfillment-centers-11596992863?mod=hp_lead_pos1

 

Owning the dirt gives you plenty of options....looks like they may not even need to demo the whole mall to go the "industrial/warehouse" route.

 

How much can they charge /sqft renting part of the mall as warehouse? It’s a lesser use for sure. It also rounds counter network effects of a mall, if you rent out part of it for other purposes.

 

I'm sure they can't charge much but even for department stores they were never able to charge much. This is probably even better in that it is lower capex than dept stores. It does take away from the network effects to some degree if the mall is thought of in a traditional sense. But the mall of the future is mixed uses - gyms, restaurant, bars, entertainment, office/hotel (maybe not anytime soon).

 

I think the best value for the dirt is in that malls are strategically located near major highways which incidentally is exactly what you need for warehouses. Additionally thanks to NIMBYism, there might not be many other options in some communities. Not to mention lower construction costs since the plumbing, electric, walls, etc. are already there.

 

This is already happening.

 

https://www.bizjournals.com/washington/news/2018/05/18/stay-shop-marriott-expands-its-partnership-with.html

 

https://www.bizjournals.com/seattle/news/2019/02/25/simon-property-group-nhl-northgate-hocky-leiweke.html

 

People are just blinded by the narrative.

[Mephistopheles]

Not really. I'd guarantee theyre getting more than the $5 sq/ft Sears and JCP are currently paying.

 

Depends on location. The avg nationawide rent/ft for a pure play warehouses is right around that number. I think GRIF charges that in Lehigh Valley. If you're talking about say NYC, then it's 4x as much. Idk how much SHLD or JCP paid in NYC.

[Gregmal]

True, but in any event, one narrative after another continues to fall and this, if accurate, seems consistent with what has been hinted at for a while and scoffed at by many.

 

Every time there is a retail bankruptcy, its like "OMG see!", but most dont understand how a bankruptcy works and if you look at the figures, who cares? Its not as though the leases are being rejected(by and large) in BK court. I'd further argue that a bankruptcy just further makes those companies reliant on their top grossing locations...another advantage to Simon.

 

They are the only company I am aware of who isn't viewed as savvy when they buy out other companies at pennies on the dollar with JV partners; in fact, its skewed as a negative despite already demonstrating the ability to turn this into a windfall. Further, bankruptcy, especially in retail, does not equal failure if you have any familiarity with the way private equity bleeds these things. But the perception remains...brand goes BK= worthless, SPG buys it = desperate.

 

The model is already out there. Look at the high end casino buildups. Entertain, living, convenience, except these will be just outside/in major cities. COVID significantly accelerated this. Trough earnings should be now through the next 18-24 months IMO. And its not like we're going to have to worry about profitability.

 

This was just written up on VIC last week as well FYI.

[Gregmal]

$2+ FFO during Q2, US mall occupancy 93%, Base minimum rent per square foot was $56.02 at June 30, 2020, an increase of 2.8% year-over-year(certainly not driven by JCP or SHLD)

 

 

The Company has collected from its U.S. retail portfolio, including some level of rent deferrals, approximately 51% of its contractual rent billed for April and May combined, approximately 69% for June and approximately 73% for July with only de minimis deferrals.  These percentages have not been adjusted for any rent abatements granted.   

 

Massive contrast to BPY

 

#retailislikesuperdead

[racemize]

$2+ FFO during Q2, US mall occupancy 93%, Base minimum rent per square foot was $56.02 at June 30, 2020, an increase of 2.8% year-over-year(certainly not driven by JCP or SHLD)

 

 

The Company has collected from its U.S. retail portfolio, including some level of rent deferrals, approximately 51% of its contractual rent billed for April and May combined, approximately 69% for June and approximately 73% for July with only de minimis deferrals.  These percentages have not been adjusted for any rent abatements granted.   

 

Massive contrast to BPY

 

#retailislikesuperdead

 

BPY said this:

Rent collections in this portfolio in the second

quarter were approximately 34%, with July collections trending significantly stronger.

 

Looks like SPG is counting rent deferrals as part of collection.  Unclear if BPY did.

[Spekulatius]

Watch the tenant receivables in the cash flow statement  -623M (or ~60% of the Q2 “revenues”). This number was positive by 48M last year.

Those revenues And FFO’s are all hot air.

[Gregmal]

Call was decent. Muted on the Amazon stuff but indicated worst was seemingly behind it(duh), although still will be issues with certain tenants. See Gap... but thats a case of scumCo trying to milk the situation rather than inability to pay. Frankly if I was DS I would just lock all the doors at Gap, Old Navy and Banana. Take a hike chumps. Otherwise seemed pretty honest about the challenges ahead and also the opportunities. Expecting to have the original capital outlay from JV's returned within a year. Only malls not open are predictably in CA.

 

Deferrals and abatements are largely par for the course/industry standard, and at least at face value, came in better than most peers. If this was the doomsday quarter....yea. Sign me up.

[Spekulatius]

The quarter wasn’t good at all. I read the transcript and can’t really follow Simon’s disclosure. He is not giving out straightforward numbers. They were also drilled on the receivables issue that caught my attention and the answer was evasive, Imo

 

Excerpt:

Nicholas Yulico

 

I'm just trying to reconcile a couple of numbers here. I know you gave the collection data, which is inclusive of deferrals for April, May, June. They ran between 50% of contractual rent to 70%. And in those months yet, if we look at your cash flow statement in the 10-Q, it's showing that your quarterly cash flow from operations were down over 90% if you just try and figure out what the quarter number is, not the 6-month number. So I mean that would presumably mean a pretty low cash collections number.

[Gregmal]

The quarter wasn’t good at all. I read the transcript and can’t really follow Simon’s disclosure. He is not giving out straightforward numbers. They were also drilled on the receivables issue that caught my attention and the as wer was evasive, I o

 

Excerpt:

Nicholas Yulico

 

I'm just trying to reconcile a couple of numbers here. I know you gave the collection data, which is inclusive of deferrals for April, May, June. They ran between 50% of contractual rent to 70%. And in those months yet, if we look at your cash flow statement in the 10-Q, it's showing that your quarterly cash flow from operations were down over 90% if you just try and figure out what the quarter number is, not the 6-month number. So I mean that would presumably mean a pretty low cash collections number.

 

I mean I dont think anyone is going into the Q expecting dazzling, tailwind driven numbers. Certainly wasn't the expectation a few months ago, nor the expectation at a $6x.00 print. But the numbers being reporting arent different than whats reported across the board. Everyone was government mandated shut for April, most May as well, and many March. So Q1 you got a hint of the impairments coming as far as rent checks being received. Q2, at best half the Q was nil. What you and the analyst are referring to, correctly, is indeed "hot air", but its also industry standard for reporting. Why would they be reporting differently than everyone else has to date? You come to an agreement on deferrals, or lease extensions, or in some cases amendments that make the lease non rejectable, it gets thrown into the column of "received". So its accounted for in some cases upfront when yea, there is an extending risk that paying back 2 months in the back half of the year never happens...but this is much less a concern with a normal store than it likely is for a movie theatre, gym or bar. Is this bs accounting across the board? Probably, but its the same exact terms the banks/lenders use/have used, even pre COVID for most covenant related issues. A LOC with a XX day delinquency trigger is not tripped despite non cash payment if there are renegotiations, abatements, or modifications related to a lease extension. The same type of stuff we're talking about here.

 

So "good"? OK, sure whatever. Same way VNO, SLG, BAM, every single other company didnt report an aesthetically "good" quarter. If this is the "disaster"/kitchen sink/end of world Q....The sky isn't falling after all. Thats good.

[fareastwarriors]

Mall owner Simon, Authentic Brands to acquire denim retailer Lucky out of bankruptcy for $140.1 million

 

https://www.cnbc.com/2020/08/14/simon-authentic-brands-to-buy-bankrupt-lucky-brand-for-140point1-million.html

[Gregmal]

Good article on the accounting

 

https://seekingalpha.com/article/4368458-q2-retail-reit-apocalypse-headline-numbers-dont-mean-squat

 

"As shown above in my prior table, accounts receivable balances at Simon Property Group are low compared to peers. Management commentary matches what is seen in the financials.

 

Meanwhile, the tone from other teams is decidedly a bit more aggressive. That might be due to management style, it might be due to more stress because they themselves have going concern worries, or some combination of the two."

[Gregmal]

primer/fluff piece on Authentic/Sparc venture.

 

https://www.cnbc.com/2020/08/17/barneys-savior-authentic-brands-has-about-1-billion-to-buy-more-troubled-retailers.html

[fareastwarriors]

https://www.cnbc.com/2020/09/09/simon-brookfield-to-save-jc-penney-from-bankruptcy-keep-650-shops.html

 

Simon and Brookfield will pay roughly $300 million in cash and assume $500 million in debt, Sussberg said.

 

Meantime, the hedge funds and private-equity firms that have financed Penney’s bankruptcy are set to take ownership of some stores and the retailer’s distribution centers, in exchange for forgiving some of Penney’s $5 billion debt load. Penney’s lenders, led by H/2 Capital Partners, are going to own those assets in two different real estate investment trusts, or REITs, Sussberg said. Penney’s landlords would then pay the lenders rent.

[Gregmal]

So a bit of anecdotal color. I put on the big boy pants this week and ventured out into the great unknown hoping not to catch covid but instead check out what a few local malls look like in todays day and age.

 

I stopped by Rockaway Mall, which is a Simon property. IMO this is property one of their worst locations, with maybe only the Toms River or Tippecanoe being worse. This is probably a classic example of what will be happening to most malls...but the location featured a Sears that several years ago shut half their store and repurposed it with half remaining and half becoming a Raymour and Flanigan. Well, now that half Sears is closing. So is the Lord & Taylor. There is also a JCP which is still open but likely facing the same fate. Inside, I noticed that probably 30% of the stores are empty. Whats left? A good chunk are things like GNC, Men's Wearhouse, a number of cell phone providers, and things of that nature. So indeed pretty gloomy. Traffic for a Tuesday was poor, which I suppose is to be expected.

 

I also stopped by Short Hills, which is a Taubman Mall, and probably the exact opposite of Rockaway. Its probably a top 5 mall in the US. And it was vibrant, remarkably packed for a Wednesday, and had next to no vacancies. New stores from the last time I was there were noticeable, including Hermes and yup, Peloton.

 

So all in all, out of the limited sample size, what I saw was largely consistent with what seems to be out there. The top tier malls will do well. The ones that lack luster will no longer likely function as traditional malls.