DBRS Confirms Ratings on BAMLL Trust 2011-FSHN

DBRS Limited (DBRS) has today confirmed the ratings of BAMLL Trust 2011-FSHN as follows:

--Class A at AAA (sf)
--Class B at AA (sf)
--Class C at A (sf)
--Class X at BBB (high) (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 YE2016 debt service coverage ratio of 2.54 times (x) compared with 2.43x at YE2015 and a DBRS issuance figure of 2.25x. The rating confirmations reflect the continued stable performance of the transaction.

The mall was constructed in 1989 and is anchored by non-collateral Nordstrom, Inc. (Nordstrom) and Macy’s department stores. 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 Apple Inc. (Apple), The Gap, Inc., Forever XXI, Victoria’s Secret, Banana Republic, Coach, Inc., Hugo Boss AG, Cole Haan, Armani Exchange and most recently, Zara. According to the December 2016 rent roll, the collateral was 96.0% occupied. Occupancy has decreased annually since issuance when the property was 99.3% occupied; however, 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 $154.35 per square foot (psf) on average, according to the December 2016 rent roll, an increase from the $152.00 psf average rental rate reported in the March 2016 rent roll and $131.35 psf at issuance.

According to the YE2016 sales report, sales volumes across the mall are down since issuance and YE2015 as well. Macy’s and Nordstrom reported YE2016 sales of $236.77 psf and $225.13 psf respectively, representing a 9.5% and 15.5% decline over YE2015 sales figures, respectively. In-line tenants occupying more than 10,000 sf reported YE2016 sales of $341.20 psf, down 21.9% since YE2015, and in-line tenants occupying less than 10,000 sf reported YE2016 sales of $772.33 psf, down 17.1% from YE2015 sales. The sales figures for tenants occupying less than 10,000 sf are misleading; however, as Apple did not report YE2016 sales figures. In 2015, Apple reported sales of $8,731.66 psf. In removing Apple’s YE2015 sales, in-line stores occupying less than 10,000 sf, reported YE2015 sales of $731.14 psf. After making this adjustment, sales for in-line tenants occupying less than 10,000 reported a year-over-year sales increase of 5.6% in 2016.

The mall recently underwent a 47,495 sf expansion and renovation at an approximate cost of $73 million that was completed in June 2016. The expansion included five new tenants, the largest of which is Zara, occupying 27,446 sf and paying a rental rate of $69.13 psf. The expansion added new dining options including a 11,000 sf Matchbox restaurant, Sugar Factory, honeygrow and Shake Shack. The renovations 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 and additional revenue to the mall.

A competitor of the subject, Landmark Mall, which is approximately 6.6 miles away, officially closed its doors as of January 31, 2017, for renovations that will transform the property into an urban-town concept. The owner of Landmark Mall, the Howard Hughes Corporation, has not finalized a timeline for the redevelopment of the property; however, it has stated that it will comprise approximately 317,000 sf of modern shops and restaurants along with 400 residential units and an updated parking structure. It will feature an open-air community with green spaces, outdoor seating, seasonal entertainment and a luxury cinema. DBRS believes this will decrease competition for the subject in the short term.

The property continues to operate in a strong and desirable location, within 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 people with a median household income of $97,144. As of March 2017, the U.S. Bureau of Labor and Statistics reported a preliminary unemployment rate of 2.5% for Arlington County compared with the national average of 4.5%.

The ratings assigned to Classes C and D materially deviate from the higher rating implied by the quantitative results. The deviations are warranted because sustainability of loan trends has not yet been demonstrated.

For more information on this rating action, please contact DBRS at info@dbrs.com.

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 principal methodology is the CMBS North American Surveillance (March 2017), which can be found on dbrs.com under Methodologies.