Aeropostale’s saviors may have a savvy strategy

Beleaguered teen retailer Aeropostale may narrowly escape bankruptcy liquidation, thanks to a pair of unlikely suitors: real estate investment trusts Simon Property Group (SPG) and General Growth Properties (GGP).

The companies, which act as landlords for dozens of Aeropostale stores, joined with liquidators and a licensing firm in a surprising late bid to save 229 of the chain’s roughly 700 remaining stores -- beating out a rival bid from a private-equity firm that planned to shutter all Aeropostale locations.

Bidding to acquire a retail tenant is a highly unusual step for a REIT, which typically would get involved in a retail bankruptcy only if the chain’s assets included owned real estate. Aeropostale leases all of its stores. In this case, however, the landlords could win twice -- by retaining tenants that otherwise would have closed and stopped paying rent, and via the profits of the reorganized retailer.

But don’t expect a repeat of such an “unlikely” landlord intervention, wrote Rich Moore, an analyst for RBC Capital Markets, in a research note. This deal is probably one-of-a-kind and not a sign of bailouts ahead for retailers struggling with declining mall traffic and fickle consumer tastes.

Macy’s (M), which owns much of its real estate, in August said it plans to shutter 100 stores, or about 15 percent of its fleet. The announcement followed similar ones from fellow retailers including Walmart (WMT), Sears (SHLD), JCPenney (JCP) and Kohl’s (KSS). Aeropostale is joined on the 2016 bankruptcy bandwagon by fellow retailers The Sports Authority (which is liquidating 450 stores) and Pacific Sunwear (which is restructuring).

Simon and General Growth have so far declined to discuss the Aeropostale deal with analysts and reporters, but they’re expected to house their investment within a subsidiary to stay in compliance with REIT rules. They’re also unlikely to be long-term owners of the chain.

“We believe that the liquidation of Aeropostale would have unilaterally benefited the company’s creditors … and would have negated the potential value of Aeropostale as a going concern to other stakeholders, including the landlords,” Moore noted. “Due to the unique circumstances, we expect that GGP and SPG’s foray into retailer bankruptcy auctions is a one-off situation in which a sizeable number of viable stores could be salvaged from an undue conclusion.”

The REITs would be in a good position to know which stores in the Aeropostale chain are worth saving because most mall lease deals include a rent component based on sales.

Both Simon and General Growth can easily afford this effort, given that the $234.3 million bid represents a rounding error for the companies, which have market capitalizations of $68 billion and $28 billion, respectively. 

Joining them in the bid are Authentic Brands Group, which owns names including Juicy Couture, Jones New York and Airwalk, and liquidators Gordon Brothers Retail Partners and Hilco Merchant Resources, which would be tasked with selling merchandise from the stores that would close.

Aeropostale, which initially filed to reorganize in May, accused lender Sycamore Partners of pushing it into bankruptcy court by tying financing to a vendor relationship. A bankruptcy judge allowed Sycamore to use the $151 million it is owed toward its own bid for the chain, which slightly exceeded the bid Aeropostale ultimately chose to accept as the best deal for stakeholders.

The bankruptcy judge still needs to sign off on the agreement and has scheduled a hearing for Sept. 12.