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

DBRS Limited (DBRS) 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 (IO) 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, respectively known as 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, restaurants and nightlife. Located within the Venetian Resort Hotel Casino, 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. Palazzo resides within The Palazzo, a hotel that 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 Inc. (GGP) invested over $2.0 million in capital improvements to adjoin the two malls, rebranding them as Grand Canal Shoppes and actively marketing the space to upper-midscale retail tenants. GGP is 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.

Per the December 2017 rent rolls, the portfolio was 87.9% occupied, which is a slight decline from 92.6% in December 2016 and 95.5% at issuance. Individually, Grand Canal and Palazzo were 93.0% and 79.7% occupied compared with 96.4% and 86.2% in December 2016, respectively. Rental rates for the portfolio have grown to $97.02 per square foot (psf) compared with $95.00 psf as of YE2016 because of scheduled rent escalations. Palazzo and Grand Canal reported average base rents of $65.15 psf and $114.33 psf as of YE2017, respectively. The largest tenants within the portfolio include Barneys New York (Barneys; 10.4% of the total net rentable area (NRA); expires January 2019), Tao Bistro/Tao Nightclub (4.9% of the total NRA; expires January 2025), Showroom Space (The Venetian Theatre; 4.8% of the total NRA; expires May 2029) and Madame Tussauds Las Vegas (3.4% of the total NRA; expires July 2019). A total of 16 tenants in Palazzo, comprising 20.5% of the NRA, have lease expirations in 2018 and an additional seven tenants, representing 28.2% of the NRA, have lease expirations in 2019. Minimal tenants in Grand Canal, representing less than 1% of the NRA, have leases scheduled to expire in 2018. There are 20 tenants in Grand Canal, comprising 19.8% of the NRA, that feature lease expirations in 2019.

The largest tenant, Barneys, 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. 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 $19.2 million as of YE2016 and $17.5 million as of YE2017, Barneys did not exercise its kick-out option and extended its lease for an additional year to January 2019. There are five tenants that name Barneys in co-tenancy provisions; however, four of the tenants 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. Despite strong and consistent visitor volume, the tenant sales report for the trailing 12 months ended December 2017 reported a 1.1% decline in sales for Grand Canal and a 5.5% decline for Palazzo. Both properties still reported strong running-12-month sales of $901 psf and $698 psf for Grand Canal and Palazzo, respectively.

Classes X-A and X-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 under Related Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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