By Esther Fung

The largest mall and strip center landlords in the U.S. are trying to combat a wave of store closures by dipping into their own pockets.

Some are acquiring retailers outright, while others are buying up space from department stores and snapping up other retail locations.

Chicago-based General Growth Properties, the second-largest real-estate investment trust by number of properties, said it bought five stand-alone stores from Macy's Inc. for $48 million since the beginning of the third quarter.

"We've been pretty opportunistic here," said General Growth Chief Executive Sandeep Mathrani, noting that his interest was sparked by Macy's August decision to close 100 stores to focus on digital investments. He doesn't rule out further acquisitions but added that the firm will be careful in its selection.

General Growth also has purchased space from Sears Holdings Corp. in the past.

Retail property landlords are battling a storm in the retail sector sparked by consumers' changing shopping habits. To win, they must identify which new investments could best recapture shoppers' attention.

They also must convince investors that snapping up properties and companies are promising growth strategies that improve their competitiveness.

"Investors are trying to figure out how much of this is reactionary or defensive and how much of it is to push the quality of the portfolio. We're in the middle of the transition," said D.J. Busch, an analyst at Green Street Advisors, a real-estate research firm.

General Growth has replaced Macy's stores with those of Dick's Sporting Goods, department store chain Belk Inc. and Lifetime Fitness. The Macy's at Tysons Galleria in Virginia will continue to operate on a short-term lease.

Landlords also are diving directly into the retailing business. In September, General Growth and Simon Property Group joined a consortium to acquire Aéropostale Inc., one of their tenants, which helped the clothing retailer stave off liquidation.

General Growth and Simon contributed $20.4 million and $33 million, respectively, to the consortium. Executives brushed off suggestions the deal was merely aimed at ensuring they retain control over the Aéropostale stores in their portfolios.

"The only reason why we decided to make this investment is because we believe we can make money," said David Simon, CEO of Simon Property, during a recent earnings call. The consortium will keep 500 stores open, more than the 240 stores initially projected, he said. The teen apparel retailer had roughly 800 stores before its bankruptcy filing.

"Amazon makes vertical investments, the cable industry makes vertical investments," said Mr. Simon, referring to AT&T's recent bid for Time Warner. "Making a vertical investment here or there is not going to overwhelm us. But I want the latitude, and the investment community should want it, too."

General Growth's Mr. Mathrani, for his part, described it as a one-off deal for his company.

Likewise, Acadia Realty Trust CEO Kenneth Bernstein recently told analysts he is looking to acquire assets that "may not be consistent with public markets but that work just fine in our fund."

The latest deals are small compared with the widespread culling of slumping shopping centers that landlords have been undertaking in recent years. Sales growth among tenants has been tepid, and landlords' re-leasing spreads, or the change in rent a square foot between expiring and new leases, have narrowed in the recent quarters.

Investors' frustration is sparking questions about further share buybacks and the wisdom of expansion in an uncertain retail environment. Luxury mall owner Taubman Centers Inc. is fending off an activist investor push to stop expanding and consider a sale of its assets as its stock price lags behind the net asset value of the malls it owns.

"We're the largest shareholder in the company, we eat our own cooking," said Robert Taubman, CEO during Taubman Centers' recent earnings call. "Over time, NAV [net asset value] will close. It has in the past, it will, in our view, in the future."

Taubman recently traded at about $70 a share, compared with NAV estimates of about $99 per share.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

November 08, 2016 05:44 ET (10:44 GMT)

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