Mall REIT juggernaut Simon Property Group (“SPG”) and General Growth Properties (“GGP”) called an audible last week in a last ditch effort to save bankrupt retailer Aéropostale from liquidation. A group ostensibly led by SPG and GGP successfully bid $243.3 million at auction, beating a credit-bid of $150 million where the most likely outcome was the shuttering of the roughly 800 remaining Aéropostale stores. Rather, the winning group intends to keep at least 229 Aéropostale stores open and operating, an unexpected end to the rollercoaster ride Aéropostale took interested parties on starting with its voluntary Chapter 11 (reorganization) filing in May followed by comments that “reorganization on a standalone basis is not feasible” in July and plans to hold an auction the following month.

Simon and General Growth’s participation in this bankruptcy auction was surprising for several reasons. For one, it’s never happened before. Yes REITs have invested in retailer-tenants in the past, including Vornado/ Toys ‘R’ Us /Sears Canada /McDonald’s, Kimco/Albertsons and recently Simon/General Growth/Macerich/Seritage-Sears. Simon and General Growth are also large creditors to their tenants and having control over the real estate is desirable in all scenarios, while leases in a bankruptcy are subject to the whims and delays of the bankruptcy courts. Yet Aéropostale is not a magnet for foot traffic or a top-10 tenant for either SPG or GGP, which points to a de minimis financial impact if all stores were to close. Aéropostale also does not own its real estate, which would have made this landlord tactic slightly less surprising. Retailer failures are so common that industry participants often refer to the post-holiday period in January/February as “bankruptcy season” and we have not previously seen a retail landlord take a similar step into the bankruptcy process.

Neither mall REIT would comment on the longer-term plan for the soon-to-be slimmed-down Aéropostale, as the next step is for the bankruptcy judge to formally approve the deal with a hearing scheduled for September 12. While we were surprised at Simon and General Growth’s investment in this troubled retailer, we continue to expect a more orderly winding down of the remaining Aéropostale stores in the coming years. Aéropostale seems destined for extinction, given an inability to capture and keep the attention of a fickle teenage customer while also competing with the seemingly unstoppable rise of e-commerce and “fast fashion” retailers. SPG and GGP are superior owner/operators of regional malls, not retailers. Nevertheless, their willingness and ability to control their own destinies, expanding the mall REIT playbook, as well as their ownership of high-quality malls should position them well over the longer term in the constantly evolving retailer/retail real estate arena.

The views expressed in this update are as of the date of this blog entry. These views and any portfolio holdings discussed in the update are subject to change at any time based on market or other conditions. The adviser disclaims any duty to update these views, which may not be relied upon as investment advice. In addition, references to specific companies’ securities should not be regarded as investment recommendations or indicative of the Adelante products, strategies, or portfolios.