David Simon as Retailer With J.C. Penney

Now that a group led by Simon Property Group and Brookfield Property is set to get the keys to J.C. Penney, Wall Street will be focusing all the more on what it means to be a landlord-retailer hybrid. 

Even as a Texas judge was in the midst of a 12-hour marathon hearing that ultimately saw the complicated sale agreement approved late Monday, David Simon was explaining — then explaining again — his company’s growing exposure to retail on a quarterly conference call with analysts.

“[Penney’s] did over $9 billion in sales pre-COVID-19. We believe we can return the company to increasing sales and grow the EBITDA,” said Simon, who is chairman and chief executive officer of mall giant Simon Property Group, referring to earnings before interest, taxes, depreciation and amortization. “The company has a loyal, core, diverse and inclusive customer base concentrated in the moderate to higher aspirational category. This customer is important to the community, as is J.C. Penney and to us, and we expect we will continue to grow this customer over time.” 

The mall operator has been inching into retail, often with intellectual property expert Authentic Brands Group as partner. Simon Property is now not just collecting rent, but also helping to operate Aéropostale, Brooks Brothers, Lucky Brands, Forever 21 and, soon, Penney’s.

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One analyst, Alexander Goldfarb from Piper Sandler & Co., asked Simon what it is about a retailer that gives the mall operator the confidence to step in. 

“Because it’s certainly not just buying something cheap enough,” Goldfarb said. “Anything can be cheap. There’s got to be something tangible that makes you feel like you can get these customers to really come back and do it in a profitable way.”

Simon started by cautioning: “Don’t underestimate buying things cheap, OK? It’s always good to do that regardless.” 

And then he gave a hint to his own retail instincts. 

“Based on the sales that we’re seeing from the brands, we do a lot of brand research and then we attack the problems with the profitability,” Simon said. “I won’t name names, but Brooks Brothers is a great example. It’s got a great following. It had the strangest real estate footprint. They had single stores that were paying $3 million a year in rent. I won’t name names. 

“The ability to reject those leases and create profitability there, get out of bad stores, reduce the overhead and then do all the special marketing and with ABG has been a winning formula,” Simon said. “In addition to that, we source it better. And since we have this platform where we can leverage our base off of, it’s just like — it’s been a very profitable thing.”

He said Simon would ultimately make more than $1 billion with SPARC, the full-service retail operator set up with ABG. 

“We know the brands,” he said, noting ABG would be buying into the Penny’s deal. “We do a lot of research. ABG has been a very good partner. They know how to blow out the license aspect of it, which we’re a partner in. We get out of bad stores. We buy the inventory at a discount. We rightsize the overhead. 

“We operate with better business judgment, and lo and behold, you suddenly have a business that’s got positive — significant positive EBITDA and you haven’t paid much for it. When you put it all together, we’ll have something that will have great positive EBITDA.”

When the analyst said he looked forward to seeing that $1 billion crystalize with an exit of the investment, Simon suggested he wasn’t in a rush. 

“It’s been a great investment,” he said. “So why — I don’t know that we’ll exit anytime soon.”

In the third quarter, Simon posted net income of $145.9 million, down from $544.3 million a year earlier, as funds from operations slipped to $723.2 million, from $1.1  billion. 

The retail portion of the business, though, was on the rise. Net operating income from Simon’s retail investments nearly doubled to $30.5 million from $15.9 million a year earlier.

Brookfield Property is also part of the deal to buy Penney, but the money is coming from a related arm, Brookfield Asset Management.

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