Property executives are unlikely stewards of youthful clothing brands. But Forever 21 is to be subsumed by two of its largest landlords after retail specialists balked at the prospect of reviving the fortunes of the distressed fast-fashion company.
A Delaware bankruptcy judge this week gave the go-ahead to a rescue bid from Simon Property Group and Brookfield Property Partners, a highly unconventional transaction that shows how turmoil in retail is upending longstanding business practices.
The shopping centre owners have teamed up with BlackRock-controlled Authentic Brands, a licensing specialist that owns Sports Illustrated magazine, to buy the chain out of bankruptcy for about $80m and an agreement to assume some of its liabilities.
Jon Goulding, Forever 21’s chief restructuring officer, told the court that the alternative was an outright liquidation of the business, which before its bankruptcy filing in September employed about 32,800 people and operated almost 800 stores worldwide.
As of this week, the retailer had only $5m of cash left — nothing like enough to cover the $24m it owed in rental payments for February.
For critics, the landlords’ decision to prop up a struggling tenant sounds the latest alarm bell about bricks and mortar retail. “It shows how weak the sector is,” said David Tawil, president of the hedge fund Maglan Capital.
Forever 21’s struggles threaten to exacerbate a developing crisis in US shopping malls, which have been particularly hard-hit by a wave of store closures and bankruptcies of household names including Sears and Toys R Us. By the end of last year shopping centre vacancies reached the highest level in at least two decades, according to Reis Moody’s Analytics.
Some of the best professionals in the retail and merchandising businesses are struggling. How is it that real estate investors are going to do any better?
In a sign that investors are increasingly concerned about the fallout, it emerged this week that a UBS real estate investment fund exposed to US retail is facing billions of dollars in redemption requests.
Simon and Brookfield have more on the line in the Forever 21 bankruptcy than other landlords. Together they were owed $13.4m in unpaid rent at the time of the filing.
Yet the risks of an outright collapse go well beyond the stores themselves.
Founded in 1984 by husband and wife Do Won and Jin Sook Chang, Forever 21 became a shopping centre stalwart after an aggressive expansion in the 2000s during which it moved into unusually large spaces.
“It’s a big hole to have in a mall,” said Craig Silvers, chief executive of Bricks & Mortar Capital. “If Forever 21 leaves, it could harm the business of other tenants.”
The departure of such a key tenant could encourage other retailers in the same centre to demand the landlord lower their rent or allow them out of leases altogether, threatening to trigger a downward spiral.
The landlords’ plan would save about 25,000 jobs, Tyler Cowan, an investment banker at Lazard who has been running the sale, told the bankruptcy court this week.
However, Mr Tawil said he was sceptical about the consortium’s longer term chances of success. “Some of the best professionals in the retail and merchandising businesses are struggling. How is it that real estate investors are going to do any better?” he asked.
During the bankruptcy several “strategic buyers” expressed an interest in snapping up Forever 21, once a hit among fashion-conscious young women thanks to its mix of affordable prices and rapidly changing styles.
None, however, made a firm offer for the company, whose financial health deteriorated after it lost ground to competitors such as H&M and Primark and it embarked on an ill-fated push into Asia and Europe.
Other prospective bidders said variously that they could not secure the necessary financing or deemed that Forever 21 was “not the right fit”, according to Mr Cowan.
The deal is small relative to the might of Simon and Brookfield, two of America’s biggest property companies.
Still, Mr Silvers said: “My concern isn’t the $80m — that’s a rounding error for Simon and Brookfield. My concern is whether it distracts management from their core business.”
It was not clear on Tuesday how many stores Forever 21’s new owners planned to keep open, although David Simon, chairman and chief executive of Simon, said last week that the deal could help save “many” of them.
He denied that they were saving the company simply to ensure the doors at his properties stayed open and the rent was paid.
“That’s obviously beneficial, and I don’t want to understate that, but that’s not why we do it,” he told analysts last week, claiming the real estate investment trust had spotted a business opportunity where others had not.
Lawyers said they were aware of only one other example of real estate companies buying a US retailer out of bankruptcy. Simon and General Growth Partners, which is now owned by Brookfield, were part of an earlier consortium that took control of struggling teen retailer Aéropostale more than three years ago.
Mr Simon said the turnround of Aéropostale had been successful. He said the 575-strong store chain, which was lossmaking when the consortium acquired it, was now profitable and he estimated it was worth about $350m.
Simon had “confidence with our ability to do the same with Forever 21”. While there was “a lot to restructure” at the company, he said, a lot could be done to improve the company’s sourcing, marketing and technology. “We think there’s a return on investment,” he said. He added that the landlords planned to use Authentic Brands expertise in branding.
Michael Kollender, head of consumer and retail investment banking at Stifel, said: “By design this is defensive. This is not the primary business of either of these landlords. But the reality is that Aéropostale was incredibly successful for the landlords. I would expect we would see more of these, in select situations.”
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