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Two of J.C. Penney Co.’s largest landlords have emerged as the leading contenders to acquire the department-store chain’s retail business out of bankruptcy, the Wall Street Journal reported. Simon Property Group Inc., the biggest mall owner in the U.S. by number of malls, and Brookfield Property Partners LP, another big shopping center owner, have joined together and are in advanced talks to purchase Penney’s retail operations, people familiar with the matter said. In recent days, the pair have eclipsed other interested bidders. Penney reviewed a competing offer from private-equity firm Sycamore Partners that carried a slightly higher price tag. But Simon and Brookfield offered certain concessions over lease agreements that Penney and its lenders viewed as delivering better value. Penney is one of Simon’s top anchor tenants, second only to Macy’s Inc. If a deal comes together, it would save Penney from a possible liquidation and mark another acquisition by Simon of a bankrupt tenant. The company was part of a group that bought Forever 21 Inc. out of chapter 11 in February and Aéropostale Inc. in 2016. Simon also has agreed to buy Brooks Brothers out of bankruptcy for $325 million in a joint bid with apparel-licensing firm Authentic Brands Group LLC.

Five months into the pandemic, hotel rooms remain largely unreserved, office space sits empty and hardly anyone is venturing into malls, the New York Times reported. Commercial tenants are struggling to pay their rents, and property owners are struggling to make payments on the loans they took out to finance the buildings. Some real estate investors, including the hedge funds and private equity firms that hold those loans, have had enough. Unwilling to risk any more missed interest payments, they are taking property owners and developers to court, hoping to foreclose on their interests in the properties and minimize their financial losses. Already, there are a few high-profile battles, including one involving a retail complex in Times Square that is owned by the family of Jared Kushner, President Trump’s son-in-law. The operators of the Mark Hotel, one of Manhattan’s most luxurious hotels, with Art Deco-inspired rooms and a suite that can cost $10,000 a night, recently beat back a foreclosure attempt in court. These cases have been initiated by a type of lender that is driven largely by narrow financial interests, but real estate lawyers and lenders expect foreclosure proceedings to become more widespread the longer commercial tenants fail to keep up with the monthly rent checks. Given that a full economic recovery from the pandemic is probably years in the making, things could get much uglier in the commercial real estate market before they improve. “When this all started in March, the first reaction was this was temporary and let’s just see how this plays out,” said H. Scott Miller, a real estate lawyer with Carlton Fields. “But we’re getting to the point where people are saying, ‘How much longer can this continue?’ This just can’t be open-ended.” The delinquency rate on large commercial loans tied to real estate in the U.S. has surged to just under 5.78 percent — nearly doubling in just one month, according to Moody’s Investors Service, a credit-rating agency. During the financial crisis that began in 2008, that rate peaked at just over 10 percent, but not until four years into the crisis. The hospitality and retail industries, which have been hit especially hard by the pandemic, account for 82 percent of the most seriously delinquent commercial loans, Moody’s said.

Bankrupt Brooks Brothers Group Inc. agreed to be bought Authentic Brands Group LLC and an entity it owns with mall landlord Simon Property Group Inc. after getting the bidders to pay an added $20 million for the two-century-old men’s clothing retailer, Bloomberg News reported. Authentic Brands and Sparc Group LLC will pay $325 million and expects to keep at least 125 locations open. Authentic recently bought Barneys New York out of bankruptcy and specializes in turning around beaten-down apparel brands. Simon, one of the biggest U.S. mall operators, needs tenants like Brooks Brothers to attract shoppers. The duo had previously disclosed they were bidding $305 million in a court-supervised auction for Brooks Brothers’ global business operations. WHP Global, owner of the Joseph Abboud and Anne Klein brands, dropped out after saying Brooks Brothers had discouraged it from making a higher bid. Brooks Brothers said on July 8 when it filed for bankruptcy that it had about 500 stores worldwide in 45 countries, with 200 in North America.

Some national chains, both retail and restaurants, are closing outlets in New York City, which are struggling more than their branches elsewhere, the New York Times reported. In the heart of Manhattan, national chains including J.C. Penney, Kate Spade, Subway and Le Pain Quotidien have shuttered branches for good. Many other large brands, like Victoria’s Secret and the Gap, have kept their high-profile locations closed in Manhattan, while reopening in other states. Michael Weinstein, the chief executive of Ark Restaurants, who owns Bryant Park Grill & Cafe and 19 other restaurants, said he will never open another restaurant in New York. ImageA Uniqlo store on Fifth Avenue. Many businesses in Manhattan are struggling because of a lack of tourists and a relatively small number of office workers. Even as the city has contained the virus and slowly reopens, there are ominous signs that some national brands are starting to abandon New York. The city is home to many flagship stores, chains and high-profile restaurants that tolerated astronomical rents and other costs because of New York’s global cachet and the reliable onslaught of tourists and commuters.

Investor Carl Icahn’s bet on the downfall of brick-and-mortar retailers produced a $1.3 billion gain during the first half of the year, Bloomberg News reported. The profit came from a short position on commercial mortgage backed securities, Icahn Enterprises LP said on Monday in a regulatory filing. Icahn’s publicly traded holding company has committed capital to his proprietary investment funds and thus reports on their returns quarterly. Icahn began making the bet, frequently called the “mall short,” in mid-2019 by purchasing credit default insurance using CMBX 6, an index highly exposed to shopping mall loans. The likelihood of defaults soared in March as the COVID-19 pandemic led to store closures and prompted more consumers to shop online, accelerating a trend already well underway. Icahn has shied away from specifying the exact size of the position, though he told Bloomberg in April, “We have billions and billions on the short side of this.” As of July 3, traders had wagered a net $8.3 billion on the BBB- slice of CMBX 6 and an additional $2.2 billion on the junk-rated portion of the index, according to the International Swaps & Derivatives Association. Icahn’s investment unit generated an 11.7 percent gain during the second quarter and a loss of 7.9 percent in the six months, according to the filing. Icahn’s six-year bet on Hertz Global Holdings Inc. came to an end with a loss of almost $1.6 billion when the rental-car company filed for bankruptcy protection in May.

Hertz Global Holdings Inc. is seeking debtor-in-possession financing more than two months after filing for chapter 11 protection, reflecting the reality that it still faces trouble ahead if travel doesn’t bounce back, Bloomberg News reported. The bankrupt rental-car giant said in a regulatory filing yesterday that it is looking for new sources of cash with the travel business in a deep slump and proceeds from the sale of its cars going to pay off creditors. Hertz had sought to avoid raising funds while it negotiates a debt restructuring with asset-backed securities holders, but the deterioration in its core rental business and uncertainty ahead leaves it with few options. The company’s revenue fell 67% in the second quarter, pushing it $847 million into the red on a net-income basis. With $1.4 billion in cash on hand, Hertz said that its continued ability to finance operations depends on a recovery in demand in key markets and an extension from creditors of waivers on payments for its cars in continental Europe and the U.K., the filing said. The company said that it saw demand rise every month in the most recent quarter, but it remains below pre-pandemic levels. Without an extension beyond Sept. 30, Hertz must start making payments on its European fleet, which is owned by investors who hold its asset-backed securities. Hertz already has reached an agreement allowing it to use much of its U.S. fleet with a commitment to pay securities holders $108 million a month from July until the end of the year. To do that, Hertz plans to shrink its U.S. fleet by at least another 182,000 vehicles after selling off 100,000 cars in June and July. Read more. 

In related news, Hertz Global Holdings Inc. raised $29 million selling its likely worthless stock before regulators dissuaded the bankrupt rental-car company from selling more, MarketWatch.com reported. The Florida-based company, which filed for chapter 11 protection in May, on Monday disclosed the results of a controversial effort to sell as much as $500 million in shares despite the severe financial strains that drove the company into bankruptcy. Hertz launched the stock sale after its bankruptcy filing, hoping to capitalize on a speculative frenzy fueled by risk-hungry day traders that gave the company a golden opportunity to raise capital it needed to cover its bills. Bankruptcies typically wipe out shareholders, and Hertz warned in June its bankruptcy "may render our common stock worthless." Its shares nonetheless went on a gravity-defying rally after its bankruptcy filing, as investors on the popular Robinhood trading app piled in. Hertz suspended the stock sale after the Securities and Exchange Commission raised questions, but not before issuing 13.9 million shares, netting $29 million, according to a securities filing by the company on Monday. The stock closed at $1.69 on Monday, implying a $240 million market capitalization. Read more. 

Brand-licensing company WHP Global Inc. has bowed out of the race for Brooks Brothers Inc., according to people familiar with the matter, leaving a venture backed by apparel-licensing firm Authentic Brands Group LLC and mall owner Simon Property Group Inc. poised to take control of the bankrupt retailer, the Wall Street Journal reported. Like Authentic Brands, WHP Global buys consumer brands, often out of bankruptcy, and revives them by shedding unprofitable locations. Sparc Group LLC, the Authentic Brands-Simon venture, had bid $305 million for Brooks Brothers last month. That “stalking horse” offer includes a commitment to keep 125 Brooks Brothers stores open. The retailer has roughly 200 stores in North America. The Sparc offer had been subject to better bids, but the deadline for rival offers passed last week. WHP and Sparc had been vying to buy Brooks Brothers since before the retailer filed for bankruptcy. WHP had submitted a bid for $334 million for Brooks Brothers in July, but the retailer deemed Sparc’s offer a better deal. The firms also competed to provide Brooks Brothers a loan to finance its bankruptcy proceedings, a battle won by Sparc. Given that, WHP decided not to move forward with its offer.

J. Crew Group’s unsecured creditors believe the company is seriously underestimating the value of the business, alleging it is doing so in order to shortchange them on recoveries, YahooFinance.com reported. The valuation gap is a substantial one — more than $1 billion. The unofficial creditors’ committee in the case argues that its experts had conducted an “extensive investigation” of J. Crew’s finances and assets, and found that the company’s enterprise value was roughly $2.94 billion. That estimate places a significantly higher value on the business than J. Crew’s own revised estimate of $1.84 billion. J. Crew’s unsecured creditors argue that the company is worth substantially more than what its lenders are owed. J. Crew’s general unsecured creditors, including trade vendors, landlords and others, estimate they are owed roughly $150 million to $200 million in claims. In a bankruptcy, general unsecured creditors are fairly low in the hierarchy of who gets repaid, and usually stand to recover a fraction of what they are owed. That dynamic often results in contentious discussions around valuations. The creditors’ committee is also seeking to file its expert reports containing their valuation estimates under seal, as it hashes out with J. Crew which of the information contained in the reports needs to be kept confidential, and whether redacted versions of the reports can later be filed publicly.

The largest mall owner in the U.S. has been in talks with Amazon.com Inc., the company many retailers denounce as the mall industry’s biggest disrupter, to take over space left by ailing department stores, the Wall Street Journal reported. Simon Property Group Inc. has been exploring with Amazon the possibility of turning some of the property owner’s anchor department stores into Amazon distribution hubs. Amazon typically uses these warehouses to store everything from books and sweaters to kitchenware and electronics until delivery to local customers. The talks have focused on converting stores formerly or currently occupied by J.C. Penney Co. Inc. and Sears Holdings Corp., these people said. The department-store chains have both filed for chapter 11 bankruptcy protection and as part of their plans have been closing dozens of stores across the country. Simon malls have 63 Penney and 11 Sears stores, according to its most recent public filing in May. It wasn’t clear how many stores are under consideration for Amazon, and it is possible that the two sides could fail to reach an agreement.