DBRS Confirms Ratings on BAMLL Trust 2011-FSHN

DBRS, Inc. (DBRS) has today confirmed the ratings on five classes of Banc of America Large Loan 2011-FSHN as follows:

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

All trends are Stable.

The transaction consists of a $410 million fixed-rate, interest-only loan secured by a 659,499 square foot (sf) portion of the 878,914 sf upscale super-regional mall, Fashion Centre at Pentagon City, located in Arlington, Virginia. The property is part of a mixed-use development that includes a Ritz-Carlton hotel and an attached 170,000 sf Class A office building, both of which do not serve as collateral for the loan. The property has performed as expected since issuance with a YE2015 debt service coverage ratio of 2.43 times (x) compared with 2.25x at issuance and 2.49x at YE2014. The rating confirmations reflect the continued stable performance of the transaction.

The mall was constructed in 1989 and is anchored by a non-collateral Nordstrom and a Macy’s department store. Macy’s owns its space and operates on a ground lease, expiring in 2020 with 12 five-year renewal options to extend the lease through 2080 with no increase in fixed rent. The property offers a variety of mid-scale to luxury tenants, including the Apple Store, The Gap, Forever XXI, Victoria’s Secret, Banana Republic, Coach, Hugo Boss, Cole Haan, Armani Exchange and most recently Zara. According to the May 2016 rent roll, the collateral was 95.6% occupied. Occupancy has decreased annually since issuance when the property was 99.3%; mall occupancy has historically been in the upper 90.0% range. While there has been a decline in occupancy since issuance, rental rates for in-line tenants have risen to $152.00 per square foot (psf) on average according to the May 2016 rent roll, an increase from the $131.35 psf to $141.31 psf range as reported in the April 2013 rent roll.

According to the YE2015 sales report, sales volumes across the mall are down since issuance and YE2014. Macy’s and Nordstrom reported YE2015 sales of $262.18 psf and $266.33 psf, respectively, which are representative of 13.8% and 10.5% sales declines over YE2014 sales figures, respectively. In-line tenants occupying greater than 10,000 sf reported YE2015 sales of $436.79 psf, down 14.5% since YE2014, and in-line tenants occupying less than 10,000 sf reported YE2015 sales of $901.44 psf, down 9.0% since YE2014, but remaining similar to the issuance sales of $912.00 psf. Excluding the Apple Store, which had sales of $8,731.66 psf, in-line stores occupying less than 10,000 sf had sales of $731.14 psf.

The mall is currently undergoing a 50,000 sf expansion and renovation at an approximate cost of $73 million, with portions first delivered in June 2016. The expansion will include five new tenants, the largest of which is Zara, which will occupy 27,446 sf and will pay an estimated rate of $69.23 psf (currently in operation). Additional dining options include two new restaurants and two new quick-service options. Matchbox will occupy 11,000 sf at a rate of $37.00 psf and The Sugar Factory will occupy 4,250 sf at a rate of $90.12 psf. Both are planned to open in fall 2016. Shake Shack is currently in operation and honeygrow is expected to open in August 2016. The renovations will also include new entrances to the mall, expanded seating, new furnishings, elevators, escalators, a redesigned food court, common-area improvements and energy-efficient lighting. The additional retail stores and restaurants serve as collateral for the subject loan and are expected to bring increased foot traffic as well as additional revenue to the mall.

According to the borrower, the decrease in sales is primarily caused by increased competition in the market. Several stores located within the mall have now opened additional stores in the area. The borrower believes that the ongoing renovations have had only a small impact on total sales; however, it is unclear if the sales volume will rebound moving forward.

The property continues to operate in a strong and desirable location, which is a densely populated trade area with high levels of disposable income that significantly outpace the national average. The population within a three-mile radius of the subject is 229,122 with a median household income of $97,144. As of March 2016, the U.S. Bureau of Labor and Statistics reported a preliminary unemployment rate of 2.7% for Arlington County compared with the national average of 5.1%. These are all indicators of a healthy local retail market.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.