In the three months since J.C. Penney (JCPN.Q) filed for bankruptcy, there have been plenty of bizarre (and not very credible) rumors about who might save the storied department store chain from liquidation. One report pegged Amazon as a buyer. Another said that retail-focused private equity firm Sycamore Partners might buy the chain in order to convert 250 stores to the smaller, lesser-known Belk nameplate that it also owns, while liquidating the rest. Even Saks Fifth Avenue owner Hudson's Bay put in a bid.

However, the most plausible report to hit the rumor mill was that a consortium including top mall owners Simon Property Group (SPG -0.51%) and Brookfield Property Partners (BPY) (BPYU) was interested in buying J.C. Penney. A recent report from The Wall Street Journal confirms that the Simon/Brookfield-led group has the inside track in the bidding.

Why buying J.C. Penney makes sense for Simon and Brookfield

Prior to its bankruptcy filing, J.C. Penney operated 846 stores. Its tentative bankruptcy plan presented in May called for shrinking the store count to 604 units, of which about 74% (nearly 450) would be located in malls. For comparison, top department store operator Macy's is in the midst of slashing its store count to fewer than 400 full-line locations.

For all its troubles, J.C. Penney is still a valuable anchor for hundreds of malls, particularly for those outside the upper echelon of properties. While J.C. Penney doesn't pay much rent -- and is likely to negotiate further rent reductions -- a liquidation of the chain could lead to an exodus of smaller tenants that pay higher rent from mid-tier malls.

The exterior of a JCPenney store.

Image source: J.C. Penney.

Furthermore, while many J.C. Penney stores would potentially be suitable candidates for future redevelopment, such projects can be extremely costly. Simon and Brookfield each have massive exposure to J.C. Penney, with 57 stores in Simon's portfolio and even more for Brookfield. Neither one would relish the prospect of redeveloping that many properties over the next few years.

Lastly, Simon and Brookfield have teamed up before to buy bankrupt tenants that had salvageable business models. With J.C. Penney's business starting to stabilize in June -- monthly operating income reached $80 million, despite a 21% year-over-year sales decline -- it looks like a prime candidate for a similar maneuver.

The latest reports

Last week, a lawyer for J.C. Penney told the bankruptcy court that the company had received several bids for its retail operations. Most of its real estate will be spun off into a separate entity controlled by the company's senior lenders. The lawyer said J.C. Penney and its lenders are close to picking a winning bid.

A group led by Simon and Brookfield is in the lead, according to sources that spoke to WSJ. While Sycamore Partners offered slightly more money, Simon and Brookfield are reportedly providing important lease concessions, making their bid more attractive overall.

This isn't very surprising. As noted above, J.C. Penney isn't a major rent payer. It accounts for just 0.3% of base rent for Simon Property Group's domestic properties. Its value to Simon and Brookfield is as an anchor to keep traffic flowing to their malls. Both mall owners would gladly offer long-term rent breaks if that's what it takes to make J.C. Penney's business sustainable -- particularly if they stand to capture the upside as co-owners of the iconic retailer.

We'll know soon enough

J.C. Penney and its lenders have placed a premium on wrapping up the bankruptcy process quickly. Given the increased uncertainty that the COVID-19 pandemic is creating, it is important to provide clarity on the company's future to vendors, employees, and other stakeholders sooner rather than later.

There's no guarantee that Simon Property Group and Brookfield Property Partners will come out on top. However, among all of the potential bidders, they have the most to lose if J.C. Penney goes out of business, and the most to gain if it bounces back. I wouldn't bet against them.