DBRS Confirms All Classes of BAMLL Trust 2011-FSHN

DBRS, Inc. (DBRS) confirmed the following classes of Commercial Mortgage Pass-Through Certificates Series 2011-FSHN issued by BAMLL Trust 2011-FSHN:

-- 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 rating confirmations reflect the overall stable performance of the transaction. The $410.0 million mortgage ten-year interest-only (IO) loan closed in July 2011 and is 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 enclosed regional mall is part of a mixed-use development that includes the Ritz-Carlton, Pentagon City hotel and an attached 170,000-sf Class A office building, both of which do not serve as collateral. The borrower is a joint venture between Simon Property Group, L.P. (Simon) and Institutional Mall Investors LLC, which is owned by an affiliate of Miller Capital Advisory, Inc. and the California Public Employees’ Retirement System. The loan benefits from consistent occupancy rates, experienced property management from Simon as well as the property’s desirable location near the Pentagon, Arlington National Cemetery and the highly anticipated second Amazon.com, Inc. headquarters (HQ2) in nearby Crystal City, Virginia.

The mall was constructed in 1989 and is anchored by non-collateral Nordstrom and Macy’s department stores. Macy’s owns its improvements and operates on a ground lease expiring in 2025 with 11 five-year renewal options to extend the lease through 2080 with no increase in ground rent. In 2016, the sponsor completed a $73.0 million renovation that added 47,495 sf of collateral for the loan. Renovations included new dining options, a new suite for Zara, a new main entrance to the mall as well as upgrades to the common areas and food court. The property offers a variety of mid-scale to luxury tenants, including Apple, Coach, Hugo Boss AG, Cole Haan, Armani Exchange and Zara.

The December 2018 rent roll showed the collateral as 96.2% occupied with weighted-average (WA) base rents of $62.77 per square foot (psf) and the entire mall as 97.2% occupied. Occupancy rates for the collateral have consistently been in the mid- to high-90% range since issuance. The collateral benefits from a granular and diverse rent roll with the largest tenant, Zara, occupying 4.3% of collateral net rentable area (NRA). Upcoming lease rollover ahead of the loan’s maturity in 2021 is limited to 15 tenants, representing 8.5% of NRA, with lease expirations in 2019 and an additional 17 tenants, representing 4.4% of NRA, with lease expirations in 2020. Recent leases for collateral tenants have featured longer terms (generally ten years) at base rents similar to the WA of the collateral, indicating new tenants’ long-term commitment to the mall.

The loan reported a year-end (YE) 2018 debt service coverage ratio (DSCR) of 2.53 times (x), slightly down from the YE2017 DSCR of 2.59x and YE2016 DSCR of 2.54x. Revenue has gradually increased year over year for the past three years because of increased base rents and other income sources; however, the net cash flow (NCF) decreased in because of increases in operating-expense items related to real estate taxes and payroll and benefits. Overall, the NCF gradually increased since issuance before leveling out in 2016.

The trailing 12-month period ending December 2018 sales report showed continued sales declines for in-line tenants occupying less than 10,000 sf (excluding Apple) with sales of $781 psf at YE2018, down 1.9% from $796 psf at YE2017. While sales for in-line tenants occupying less than 10,000 sf have been declining since YE2016, sales figures remain slightly above the issuance sales figure of $753 psf and are relatively healthy overall for a premier regional mall. Collateral tenants occupying more than 10,000 sf reported a 1.1% decline in sales to $402 psf at YE2018 from $406 psf at YE2017, led by Abercrombie & Fitch’s 6.1% decline. Overall, YE2018 sales for tenants over 10,000 sf were 28.3% lower than the issuance figure of $561 psf.

The subject’s location has been the topic of conversation since Amazon announced its HQ2 plans in November 2018, which will be located less than one mile from the subject. According to various articles, the online megaretailer will open its offices in Crystal City by YE2020. The Memorandum of Understanding between Amazon and Virginia stated that HQ2 will initially offer 25,000 new jobs with salaries averaging $150,000. The high-paying jobs and publicity of the ongoing construction of HQ2 bodes well for the collateral, which is the closest traditional, enclosed regional mall to the proposed HQ2 site. DBRS continues to monitor ongoing developments in the area as the loan approaches its maturity date in 2021.

Class X is an IO certificate that references 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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