DBRS Assigns Provisional Ratings to GSMS 2012-SHOP

DBRS has today assigned provisional ratings for the following classes of GS Mortgage Securities Corporation Trust 2012-SHOP, Commercial Mortgage Pass-Through Certificates, Series 2012-SHOP (GSMS 2012-SHOP). The trends are Stable.

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (low) sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)

The collateral for the transaction consists of the borrower’s fee simple and leasehold interest in two adjacent, connected malls (Grand Canal Shoppes and Palazzo Shoppes) located in Las Vegas, Nevada. The borrower acquired the properties in 2004 and 2008, respectively, for a total cost basis of $1.1 billion. Located within the Venetian Resort Hotel Casino, the Grand Canal Shoppes contains 499,247 square feet (sf) of retail, restaurant, entertainment and office space. The hotel and mall opened in 1999 on the site of the former Sands Hotel, a Las Vegas fixture for more than 40 years. Mall improvements consist of cobblestone walkways, painted sky ceilings and a Renaissance Venice streetscape motif. A quarter-mile long “Grand Canal” transverses the subject and visitors can take a ride on motorized gondolas. The mall is also highlighted by a life-size replica of St. Mark’s Square, the famed city center of Venice. Located within the Palazzo Hotel, the Palazzo Shoppes contains 316,340 sf of luxury retail, restaurant and nightclub space. The Palazzo Hotel was completed in 2007, and the hotel is currently the tallest building in the state of Nevada. The Palazzo Shoppes opened in 2007 and boasts a modern European design, highlighted by a 60-foot glass dome lobby and a two-story fountain.

The properties benefit from a very strong location at the northern end of the Las Vegas Strip. Most development has occurred within a 2-mile stretch along the Strip, and its northern half has emerged as the dominant end in recent years. The subject properties have rebounded very well from the economic downturn of the past few years, with comparable sales from in-line tenants occupying less than 10,000 sf growing 15.5% to $986 psf during the trailing 12 months (T-12) ending March 31, 2012, period from their 2010 low of $854 psf. In addition, growth from this T-12 level compared to YE2011 was quite brisk at 4.1%. GGP anticipates 2012 year-over-year sales growth to come in near 10% by year-end. Additional performance gains made in the recent past include seven new leases or leases out for signature representing 48,651 sf (6.0% of NRA), including some difficult-to-lease space that had not been occupied since construction. Total new leasing activity since 2012 includes 13 tenants that will occupy 68,808 sf. This strong leasing velocity will result in the properties being 95.2% occupied (counting temporary tenants as occupied) if all of the leases out for signature are converted into executed leases.

Barneys, the largest tenant at either property, and the only traditional department store anchor, occupies 84,743 sf and has an option to terminate its lease in January 2015. It is allowed to terminate its lease with 180 days’ notice if annual sales do not reach $37.5 million. Sales for the T-12 period ending March 31, 2012, were only $19.1 million. Barneys occupies a prominent three-story space with an entrance on the main circle drive for the Palazzo Hotel, and has good visibility from the Strip. The space is considered very desirable, and it is the opinion of DBRS that Barneys’ struggles are not a result of the space it occupies. GGP anticipates that Barneys will terminate its lease and considers it a good opportunity to recapture valuable space. The appraiser estimates that GGP could generate $4.8 million more income from the space if it was re-tenanted to multiple users, and DBRS considers the underlying assumptions to be quite reasonable. Only five tenants, representing 3.3% of total rent, name Barneys in co-tenancy clauses.

If the Barneys lease terminates or has a rent reduction prior to its scheduled expiry in 2018, and the net operating income (NOI) debt service coverage ratio (DSCR) is less than 2.90x (greater than the Issuer underwritten NOI DSCR of 2.66x), the sponsor is required to execute a master lease with an expiry date three years beyond the maturity date of the loan. The DSCR calculation will exclude income from Barneys and any amounts that would cease to be payable due to co-tenancy clause violations. The amount owed under the master lease is generally defined as the positive difference between (1) what was payable by Barneys and any tenancy affected by co-tenancy clauses and (2) income from tenants occupying former Barneys or co-tenants’ space as well as income from tenants that never left. DBRS considers the structural enhancements as well as the re-tenanting strategy to be adequate mitigating factors to the termination option, and as such DBRS included all rental income currently paid by Barneys.

The loan has minimal default risk during the ten-year loan term, as the DBRS Term DSCR is quite high at 2.47x and no individual tenant contributes more than 5.0% of total income. DBRS value, a 29.3% discount to the appraised value, results in a modest DBRS LTV of 69.3%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

All classes are privately placed pursuant to Rule 144a. The Class X-A and Class X-B balances are notional. DBRS ratings on interest-only certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the interest-only certificate’s position within the transaction payment waterfall when determining the appropriate rating.

The applicable methodology is CMBS Rating Methodology, which can be found on our website under Methodologies.