DBRS Morningstar Confirms Ratings on BAMLL Trust 2011-FSHN, Negative Trends; Removes from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the 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 Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on April 24, 2020.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com.

During its review of the ratings for this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The $410.0 million loan is secured by the Fashion Centre at Pentagon City. The collateral includes 601,454 square feet (sf) of an 820,869-sf enclosed regional mall located in Arlington, Virginia. The enclosed regional mall is part of a mixed-use development that includes a Ritz-Carlton Hotel and an attached 170,000-sf Class A office building, neither of which serves as collateral for the loan. The fixed-rated, 10-year lean loan matures on July 1, 2021, and pays interest only (IO) throughout the term. The loan has performed well over the loan term, as the loan has exhibited a debt service coverage ratio (DSCR) of at least 2.53 times (x) since 2016 and had a DSCR of 2.54x at YE2019.

The sponsor is a joint venture between Simon Property Group, L.P. and Institutional Mall Investors LLC., which is owned by an affiliate of Miller Capital Advisory, Inc. and the California Public Employees’ Retirement System.

The property was developed in 1989, and the final stages of a 47,495-sf expansion and renovation were completed in June 2016 for an approximate cost of $73.0 million. The expansion included the addition of five new tenants, the largest of which is Zara, and the renovations included new dining options, new entrances to the mall, upgrades to the common areas and food court, new elevators, and energy-efficient lighting. The mall experiences high tourist traffic from its proximity to the Pentagon, Arlington National Cemetery, Ronald Reagan Washington National Airport, and the Washington Metropolitan Area Transit Authority (Metro) system connection. A recent report by the Metro relayed that the average weekday rail ridership at the Pentagon City stop for August 2020 was 1,714 average daily entries, representing a variance of -86.5% compared with the August 2019 average weekday rail ridership of 12,687. Because of the pandemic, the mall was closed from March 19, 2020, to May 29, 2020.

The property is anchored by a Macy’s and Nordstrom. The ground-leased pad beneath the Macy’s owned store is collateral for the loan; however, the Nordstrom store is not part of the collateral. Both the Macy’s and the Nordstrom are currently open and there have been no indications from either tenant that these stores plan to permanently closed. The Macy’s store can be released from the collateral with a partial defeasance at the greater of the purchase price or $10.2 million.

The property was reported to be 94.1% occupied as of the June 2020 rent roll, which is below the December 2019 occupancy rate of 95.1%. Outside of the Macy’s space, the property’s rent roll is fairly granular. The largest tenants leasing space at the subject besides Macy’s include Zara, Forever 21, Victoria’s Secret, and Gap; these tenants collectively account for only 12.6% of the net rentable area. While Forever 21 and Gap had lease expirations occurring in 2018, Forever 21 extended its lease at the property through January 2023 and Gap extended its leases through January 2020. Former tenants such as Abercrombie & Fitch, Papyrus, True Religion, and Swatch have all closed at the property over the past couple years. The YE2019 sales for in-line tenants occupying less than 10,000 sf (excluding Apple) was $806 psf, which is higher than the YE2018 sales figure of $781 and the YE2017 sales figure of $796. The sales figures remain above the issuance sales figure of $753 psf and are relatively healthy overall for a premier regional mall. Yet, DBRS Morningstar expects sales to fall in the YE2020 from the mall closure in response to the coronavirus pandemic, a decline in ridership on the Metro, and a decline in tourism in the Washington, D.C., metropolitan area.

In 2018, Amazon announced its decision to establish its second headquarters in Crystal City, about one mile from the Fashion Centre site. Completion was projected for 2020. The new headquarters should have a beneficial impact for the mall; however, this impact is delayed because Amazon implemented work-from-home measures amid the pandemic. DBRS Morningstar has also been monitoring the redevelopment of the Landmark Mall, located approximately seven miles southwest of the subject in Alexandria, Virginia. The redevelopment could potentially add a competitor for Fashion Centre. However, these redevelopment plans date back to as early as 2006 and have yet to commence. Any work on the property appears like it would begin in 2021 at the earliest.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure was $50.2 million and DBRS Morningstar applied a cap rate of 6.75%, which resulted in a pre-coronavirus DBRS Morningstar Value of $744.8 million, a variance of -2.6% from the appraised value of $765.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 53.6% compared with the LTV of 55.0% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the market positioning, location, and quality of the asset.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 4.5% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 10.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had variances that were generally higher than those results implied by the LTV sizing benchmarks for Class D. The variation is warranted due to concerns with the impact of the coronavirus pandemic on the collateral assets and all classes were assigned Negative trends.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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