In a year when bankruptcy filings exploded among retailers, Ascena Retail Group (OTCMKTS: ASNAQ) jumped on the bandwagon. It filed for Chapter 11 in July 2020, and since entered into a deal with Sycamore Partners, a leading private equity firm, to purchase its remaining brands, which include Ann Taylor, Loft, and Lane Bryant. Previously, Ascena sold off its Justice brand and announced the closure of all stores.
Now, Ascena is looking to move out of bankruptcy and has submitted a formal plan of reorganization. But one major mall operator isn't pleased with its contents and is aiming to stop it from getting approved.
Why Simon Property Group is fighting back
Simon Property Group (NYSE: SPG), the country's largest mall operator, has filed papers seeking to block the approval of Ascena's reorganization plan. The reason? Sycamore Partners is now planning to close more stores than what was initially agreed upon.
Originally, Sycamore had committed to keeping at least 900 stores among Ascena's brands open following its reorganization, and a master lease it entered into with Simon reflected that. But Sycamore has since changed its tune, which has Simon worried.
Simon now claims that closing more stores makes Sycamore a less creditworthy lessee. Additional store closures will, as Simon states, significantly reduce the profitability of Sycamore's brick-and-mortar business. Simon has also expressed concerns that closing stores will trickle down to Sycamore's e-commerce business, claiming a strong physical presence is key for solid digital sales.
Of course, Simon may be opposing Ascena's reorganization plan on the basis of a misrepresented lease and concerns about creditworthiness, but it's easy to see it's really worried about losing more tenants. Given the number of retailers that have gone bankrupt or closed stores over the past 12 months, Simon, along with other mall operators, can't afford to part with any more rental revenue -- especially at a time when department stores are also shuttering or making plans to move away from malls.
Simon is so desperate for tenants, in fact, that last year, it, along with fellow mall operator Brookfield Property Partners (NASDAQ: BPY), bought J.C. Penney (OTC: JCPNQ) out of bankruptcy and now owns its stores as part of its portfolio. This isn't the firm time Simon has scooped up a defunct retailer in an effort to retain a key tenant. Simon also owns Brooks Brothers, Lucky Brand, and teen favorite Forever 21.
In fact, Simon has expressly called on its experience in taking over bankrupt retailers as a reason to take its concerns seriously. Whereas Simon has managed to salvage a number of dying brands, Sycamore has a track record of running others into the ground, including Nine West and Talbots. As such, Simon is arguing that Sycamore's track record alone can't compensate for its diminished creditworthiness.
The Millionacres bottom line
Of course, Simon isn't the only mall operator worried about closures. If more retailers bite the dust in the course of the next 6 to 12 months, malls could soon have a significant vacancy crisis on their hands -- something investors in mall real estate investment trusts (REITs) and commercial landlords will need to keep on their radar.