Last month, J.C. Penney (OTC:JCPN.Q) filed for bankruptcy protection, following a decade of turmoil marked by several management changes, falling sales, and plunging profitability. While J.C. Penney was able to line up $450 million of debtor-in-possession financing -- half of which is available immediately -- that will only keep the iconic department store chain afloat temporarily. If the company fails to produce a viable go-forward business plan in the weeks ahead, the restructuring could be converted into a complete liquidation as soon as mid-July.

J.C. Penney's biggest landlords might have something to say about that, though. Leading mall REITs Simon Property Group (NYSE:SPG) and Brookfield Property REIT (NASDAQ:BPYU) -- which also trades as Brookfield Property Partners (NASDAQ:BPY) -- are considering teaming up with private-equity firm Sycamore Partners to rescue the ailing retailer, according to Reuters.

A new restructuring plan

When J.C. Penney filed for bankruptcy protection last month, it put forward a plan to quickly reduce its debt so that it could emerge from the restructuring process within a few months. Management's plan for exiting bankruptcy hinges on spinning off much of J.C. Penney's real estate as a new REIT. A separate company would operate the core retail business.

The exterior of a JCPenney store

J.C. Penney filed for bankruptcy protection in mid-May. Image source: J.C. Penney.

While there could be some advantages to this structure, it's far from a slam dunk. Given the turmoil upending the retail industry, the REIT might struggle to find new tenants for any properties vacated by the J.C. Penney retail business. Redevelopment work is also very expensive. Meanwhile, the retail business would be saddled with higher costs, as it would have to pay rent to the new REIT.

If this business plan isn't attractive enough to creditors and potential investors, an acquisition would be J.C. Penney's only hope of survival. Amazon.com has apparently been sniffing around the company and considering a bankruptcy bid. However, I'm skeptical that anything will come of this. There's plenty of retail real estate available today, and lots more is likely to come on the market over the next year or two due to the post-COVID-19 retail shakeout. If Amazon wants to try operating large-format stores, it would make more sense to build them from scratch.

A more plausible acquisition scenario emerged last week. Private-equity firm Sycamore Partners, which owns multiple retail brands (including regional department-store chain Belk) is interested in buying J.C. Penney, if negotiations between the retailer and its creditors fall through. One option under consideration is a joint bid between Sycamore and top mall owners Simon and Brookfield. This could be J.C. Penney's best hope for survival.

Why Simon and Brookfield might intervene

The conventional wisdom is that Simon Property Group and Brookfield Property REIT would be perfectly happy for J.C. Penney to disappear. They own lots of valuable, top-tier malls where they charge high rents. However, as a long-standing anchor tenant, J.C. Penney pays very little rent (and no rent, in the case of stores that it owns outright). Thus, store closures would give Simon and Brookfield opportunities to redevelop those locations for higher-paying tenants.

The interior of Simon Property Group's Roosevelt Field Mall

Simon and Brookfield own some of the best malls in the U.S. Image source: Simon Property Group.

There's some truth to this perspective. That said, it could be difficult to find replacement tenants in the current environment. Many mall owners have responded to changing retail trends by redeveloping former department store buildings for fitness, entertainment, and dining uses. If anything, those "experiential" tenants have been hit even harder by the COVID-19 pandemic than retailers.

Furthermore, Simon Property Group has 63 J.C. Penney stores in its portfolio. Brookfield has even more exposure, with 73 stores. Many of those stores are in malls that are average or above-average -- but not the cream of the crop. There would be limited value in recapturing space from J.C. Penney in those malls. Moreover, having anchor vacancies for an extended period could hurt those properties' long-term prospects.

Finally, redeveloping a department store often costs $20 million or more. Considering the number of locations involved, the total redevelopment cost would be substantial. By buying J.C. Penney and preventing a liquidation, Simon and Brookfield would significantly reduce the near-term capex burden they face. (Some stores will close even if J.C. Penney stays in business; the retailer recently announced a first round of 154 store closures.)

Importantly, there's precedent for Simon and Brookfield to buy retailers out of bankruptcy to keep them alive. Just a few months ago, the two teamed up with Authentic Brands Group to buy Forever 21. And in 2016, Simon, General Growth Properties (which was later acquired by Brookfield), and Authentic Brands Group saved Aeropostale from liquidation.

The next month or two will be crucial

While Simon and Brookfield have a vested interest in avoiding an immediate liquidation of J.C. Penney, they also don't want to lose a lot of money in any potential deal. That means they aren't likely to make a bid unless there are clear signs that the retailer's business is stabilizing.

So far, fewer than 500 of J.C. Penney's 846 stores have reopened. Sales in the first batch of stores to reopen are down about 33% year over year. That's not too bad considering that many people are still reluctant to venture out, but J.C. Penney was already struggling with weak customer traffic before the pandemic: It can't afford any further declines.

If J.C. Penney can reopen the rest of its stores later this month and achieve sequential improvement in sales trends over the next several weeks, Simon and Brookfield might get serious about putting in a bid for the company. By contrast, if traffic remains depressed for a longer period of time, liquidation could become inevitable.