It's been a tough year for Simon Property Group (NYSE: SPG) as the coronavirus crisis has forced numerous retailers into bankruptcy and prompted others to permanently close stores in short order. It's estimated more than 25,000 stores could close this year in the wake of the pandemic, and given the number of retailers, like Macy's (NYSE: M), planning on closures even before the outbreak began, shopping malls could really start struggling to retain tenants in the not-so-distant future.
That's clearly a concern for Simon. As the country's largest mall operator, the commercial real estate giant relies on both department stores and regular retailers to fill its shopping centers and pay rent. And that's just one reason why it's adopted a rather interesting strategy this year: saving bankrupt retailers.
Earlier this year, Simon teamed up with Authentic Brands Group to buy privately owned Brooks Brothers, which filed for bankruptcy over the summer. It also bought bankrupt chain Forever 21 earlier in the year along with fellow mall operator Brookfield Property Partners (NASDAQ: BPY). Most recently, the two teamed up to rescue J.C. Penney (OTC: JCPN.Q) from bankruptcy as well.
But while buying struggling retailers makes sense for Simon on one hand, it does beg the question: Is paying for failing retailers worth the rental income salvaged in the process? Or would Simon be better off thinking of new ways to expand its tenant base?
A viable solution
Malls like the ones Simon operates rely on steady tenants to stay afloat. They depend even more so on anchor stores like J.C. Penney to draw in customers and entice other tenants to stay put. As such, buying certain retailers out of bankruptcy could pay off by allowing Simon to enjoy a solid income stream and attracting existing and new mall tenants alike.
But Simon isn't just buying defunct brands to salvage rental income; it's looking to make money on those brands as a side business of sorts. The retailers Simon has handpicked have their own loyal customer base, and if they do well, Simon benefits in more than just a landlord capacity.
That said, Simon may want to be a bit more conservative with its cash given the state of the shopping mall right now. With foot traffic down due to the pandemic and coronavirus cases surging nationwide, there's a good chance malls will stay sluggish well into 2021. Meanwhile, tenants have been shorting Simon on rent left and right, which cut into the company's revenue, too. And while there's a good chance in-person shopping will surge following the pandemic, Simon needs to think about cash flow preservation at a time when so many unknowns abound.
The bottom line
Therefore, while buying failing retailers could work out well for Simon, the mall operating giant may want to curb that practice now that it already has a number of bankrupt entities in its portfolio. Given that Simon may also need to sink serious cash into ensuring a safer shopping experience in light of the pandemic, putting the brakes on retail acquisitions could be its best bet in the near term.