DBRS Confirms Ratings of GS Mortgage Securities Corporation Trust 2012-SHOP with Stable Trends

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2012-SHOP issued by GS Mortgage Securities Corporation Trust 2012-SHOP as follows:

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

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction. The loan is structured with an interest-only, seven-year term and is collateralized by the fee and leasehold interests in two connected super-regional malls totalling 815,587 square feet (sf) in Las Vegas, Nevada, respectively known as the Grand Canal Shoppes (Grand Canal) and the Shoppes at the Palazzo (Palazzo).

Both properties are located at the northern end of the Las Vegas Strip, one of the most popular tourist locations in the United States, with an abundance of retail, restaurant and nightlife. Located within the Venetian Hotel Resort, Grand Canal features nearly 500,000 sf of retail, restaurant, entertainment and office space. Included in the mall’s Venice motif are cobblestone walkways, painted sky ceilings, a life-sized replica of St. Mark’s Square and a quarter-mile canal offering visitors motorized gondola rides. The Shoppes of Palazzo resides within the Palazzo Hotel and features approximately 315,000 sf of luxury retail, restaurant and nightclub space. While both spaces have similar offerings, Grand Canal features more restaurants and entertainment, whereas Palazzo caters more toward the upper-midscale shopper. During 2013, the sponsor, General Growth Properties (GGP) invested over $2.0 million in capital improvements to adjoin the two malls, rebranding them as The Grand Canal Shoppes and actively marketing the space to more upper-midscale retail tenants. GGP is considered to be a strong sponsor with extensive experience in the retail industry and the ability to change and expand its properties to meet the needs of tenants.

As per the December 2016 rent rolls, the portfolio was 92.6% occupied, in line with 92.3% at YE2015 and 95.5% at issuance. Individually, The Grand Canal Shoppes and the Shoppes of Palazzo were 96.4% and 86.2% occupied, compared with 93.3% and 89.5% at YE2015, respectively. Rental rates for the portfolio have grown to $95.00 per square feet (psf) compared with $90.77 psf at YE2015 because of scheduled rent escalations. The largest tenants within the portfolio include Barney’s New York (Barney’s; 10.3% of the total net rentable area (NRA), expires January 2025), Tao Bistro/Tao Nightclub (4.9% of the total NRA, expires January 2025), Showroom Space (The Venetian Theatre) (4.9% of the total NRA, expires May 2029) and Madame Tussauds Las Vegas (3.5% of the total NRA, expires July 2019). Over the next six months, tenant rollover is limited to three tenants representing less than 1% of the NRA at The Grand Canal and two tenants representing 1.7% of the NRA at The Shoppes of Palazzo.

The largest tenant, Barney’s (10.3% of the total NRA), occupies three levels at the Palazzo totalling 84,743 sf of prime retail space with excellent frontage on, and sight lines to, Las Vegas Boulevard. Barney’s has struggled as a company since it was taken private in 2007. At issuance, the tenant had a lease kick-out option available in 2015 if gross sales revenue was less than $37.5 million. Despite reporting sales volume of $19.9 million at YE2015 and $19.2 million at YE2016, Barney’s did not exercise its kick-out option and extended its lease for an additional year to January 2019. At issuance, DBRS noted significant upside potential in recapturing the Barney’s space, re-purposing it for new, upscale or luxury retailers or restauranteurs on the Las Vegas Strip. There are five tenants that name Barney’s in co-tenancy provisions; however, all tenants, with the exception to one, allow for suitable replacement tenants that would be satisfied by GGP’s re-leasing plans.

Portfolio performance is heavily dependent upon tourism, particularly foreign tourists, as half of the subject’s customer base resides outside the United States. According to the Las Vegas Convention and Visitor Authority, visitor volume experienced growth of 1.4%, reaching 42.9 million visitors in 2016 compared with 42.3 million in 2015 and 41.1 million in 2014, and these trends are forecasted to continue in 2017. CONEXPO-CON/AGG, the construction industry’s largest trade show, held its first exposition in three years in Las Vegas, contributing approximately 128,000 visitors in March 2017. Since 2009, total visitor volume has been trending upward and will continue to be strong in the midst of Microsoft’s first show in the city, which is forecasted to attract roughly 60,000 people in June 2017. Despite strong visitor volume, according to the tenant sales report for the trailing 12 months ending December 2016, The Grand Canal Shoppes reported a 1.6% decline in year-to-date (YTD) sales, and The Shoppes at Palazzo reported a 5.9% decline in YTD sales. According to the servicer, these declines are related to an overall decline in brick and mortar sales across the country. Both properties still reported strong running 12-month sales of $897 psf and $696 psf for The Grand Canal Shoppes and Shoppes at Palazzo, respectively.

The ratings assigned to the Class B and D notes materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given the sustainability of loan performance trends not demonstrated.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The principal methodologies are North American CMBS Rating Methodology (January 2017) and CMBS North American Surveillance (December 2016), which can be found on www.dbrs.com under Methodologies.