A proposed deal to sell apparel company Express Inc. to a consortium that includes brand management firm WHP Global and mall REITs Simon Property Group and Brookfield Properties would not require Simon Property Group to put up any capital, CEO David Simon told analysts Monday.
A spokesperson for Brookfield declined to comment on whether it would be privy to similar terms.
“On Express, we were approached by the IP owner. I think it's not overly complicated in the sense that they saw what we had done historically, both with [Authentic Brands Group] and Sparc, and offered us to participate with no capital, but also add our expertise and our knowledge,” David Simon said. “And because we have always valued Express as a retailer and as a client, we jumped at the opportunity.”
WHP Global holds a majority stake in an intellectual property joint venture with the bankrupt apparel retailer, which filed under Chapter 11 last month saying it planned to close more than 100 stores. Express Inc. has also said it filed for bankruptcy in order to facilitate a sale, after it received a non-binding letter of intent from the consortium “for the potential sale of a substantial majority of the Company’s retail stores and operations.”
A shrinking portfolio
Buying up Express would resume an acquisition strategy that Simon Property Group seemed to be abandoning.
In recent years the company has partnered with Brookfield and/or Authentic to buy up various troubled retailers, and invested in Authentic itself. The three companies together now own J.C. Penney, which emerged from bankruptcy in 2020. That year Simon and Authentic also formed joint venture Sparc Group, responsible for the retail operations of various brands, including Forever 21, Brooks Brothers and others, whose IP is owned by Authentic.
However, the addition of retail to a REIT’s portfolio represents a level of business volatility that some observers view as contrary to the typical appeal of real estate investment. David Simon has long acknowledged that volatility but has emphasized the REIT’s minimal exposure.
Still, its retail investments have been in decline. In Q1 the net operating losses from Simon Property Group’s “other platform investments” — which included J.C. Penney, Sparc, Authentic, e-commerce company Rue Gilt Groupe and real estate development company Jamestown — widened to $83 million, from $27.5 million a year ago, according to Monday’s earnings presentation. At J.C. Penney in particular, net sales during its most recently reported quarter fell 10.7% year over year to $1.5 billion, as net loss widened by 76.5% to $30 million. For the nine months ended Oct. 28, EBITDA plunged 55.3% to $181 million.
On Monday, David Simon said the company is “pleased with Penney,” adding that the department store “is able to produce positive EBITDA even if there's not high sales” and that it could benefit from opening new stores. But Simon has been unwinding its stakes in other retailers and brands for months.
Last year, David Simon told analysts that the company could pull out of its retail investments within five or 10 years, and the company promptly began that process: in 2023 it reduced its stake in Sparc from 50% to 33% and disclosed it had sold off its interest in an Eddie Bauer licensing joint venture.
Most recently, the REIT completely divested from Authentic Brands Group, a process also begun last year. On Monday, Simon said that during the first quarter it sold its remaining interest in the brand management firm. Factoring in the Q4 sale of part of the Authentic stake, the divestment generated total gross proceeds of $1.45 billion, according to a Q1 earnings presentation.
Adding to a shrinking portfolio
David Simon told analysts on Monday that, if the Express acquisition goes through, that doesn’t mean the zero-capital price will be a model for future acquisitions of retail tenants. But he said the company remains open to such takeovers.
“What does it mean to the portfolio? We don't want volatility, but we'll certainly accept it if we think it's going to be a good investment,” he said.
While many analysts believe the mall REITs are pursuing retailers in order to keep their spaces filled, both Simon and Brookfield say their involvement has helped save jobs and businesses that are important to communities.
“We're comfortable that Express is a good company and is a great brand, and we can add value to it,” David Simon explained to analysts. “And given the fact that we were able to hopefully turn around the retailer, save jobs, create value from our investment, we see it as a win-win situation with no capital from our standpoint.”
For his part, Kevin McCrain, chief executive officer of Brookfield Properties’ U.S. operations, earlier this week noted that, with 79 stores at Brookfield Properties, Express is a major tenant. He also said that the company's investment in J.C. Penney arose in part out of a concern for preserving jobs.
“There's an opportunity to potentially acquire part of a legacy brand that is a massive tenant in our asset,” he said, adding that Brookfield has a “great track record” in partnering with a group of investors to acquire retailers.
As far as what Simon would bring to the table for this proposed transaction, David Simon offered no details, and a spokesperson for the company didn’t immediately respond to questions about that. Speaking to analysts, he said that Simon Property Group would provide expertise for Express’ post-bankruptcy turnaround.
“As part of any bankruptcy, we're going to have a lease negotiation,” he said. “Some leases will get restructured, some won't, some will pay what the existing rent is, and so on.”
