Simon Property Group SPG -0.15 % and General Growth Properties Inc. GGP -0.46 % were part of a consortium that last week won an auction to purchase teen-apparel retailer Aéropostale, an unusual move in which shopping-center landlords stepped in to rescue a tenant to preserve the tenant’s business.
‘Liquidation and bankruptcies tend to be messy and landlords would rather avoid that at nearly all cost.’
Simon and General Growth saw value in keeping afloat Aéropostale, which had filed for chapter 11 bankruptcy protection in May and later faced the threat of liquidation. Aéropostale stores potentially generate more than $1 billion in global retail sales, of which more than $800 million is from the U.S., said General Growth Chief Executive Sandeep Mathrani in a news release. Simon counts 160 Aéropostale stores and General Growth has 77 in their respective tenant portfolios.
General Growth and Simon declined to comment about their turnaround strategy for Aéropostale.
Faced with rising vacancies as retailers close their stores amid the increasing popularity of online shopping, landlords are trying to find ways to avoid being left with crumbs, said Tom Mullaney, managing director of restructuring services at real-estate consultancy firm JLL.
“It’s going to be a very interesting experiment to see if they can operate the retailer successfully,” Mr. Mullaney said.
When retailers file for bankruptcy and are liquidated, landlords are vulnerable to vacancies and undesirable situations where the tenant might stay open for a prolonged period to sell down inventory.
Landlords don’t like to see going-out-of-business-sale signs on the windows and fear being stuck with blighted space, said Thomas Dobrowski, senior managing director of capital markets with real-estate-services firm Newmark Grubb Knight Frank. That restricts the landlord’s ability to find higher-caliber, creditworthy tenants or market the space at higher rents.
“Liquidation and bankruptcies tend to be messy and landlords would rather avoid that at nearly all cost,” said D.J. Busch, an analyst at Green Street Advisers. “That said, we have not seen landlords step in and ‘save’ a distressed retailer as it seems to be the case with Aéropostale. This seems unprecedented.”
Shopping-center landlords have bought out distressed retailers in recent years, but primarily for the real estate they owned rather than to preserve the tenant’s business.
In the early 2000s, retail property landlord Kimco Realty Corp. KIM 0.74 % , along with other lenders, extended financing to discount retail chain Ames Department Stores Inc. with its properties as collateral. Ames eventually folded. In 1995, Steven Roth, CEO of Vornado Realty Trust, bought a controlling interest in ailing discount department store Alexander’s Inc. ALX 0.58 % Alexander was then converted to a real-estate investment trust.
In contrast, the deal by Simon and General Growth seems to be more defensive, with the pair moving in only when it became apparent no other party was going to put in a bid to keep Aéropostale from going out of business.
If the retailer had gone through a liquidation, the landlords would have been left with more than 200 vacant stores, and might only get one-year’s rent or 15% of the remaining lease payment, whichever is greater. But rental leases are typically an unsecured claim and landlords are parked at the bottom of the distribution totem pole behind secured creditors.
Simon and General Growth led a consortium that included Authentic Brands Group, Hilco Merchant Resources and Gordon Brothers Retail Partners to invest $243.3 million for the acquisition, which they say saved thousands of jobs and will keep the brand available in more than 400 stores in the U.S. and Canada.
Leasing agents have said that some mall landlords are agreeable to lower rents for Aéropostale following the bailout. Court documents showed Aéropostale had been operating 623 retail stores.