Steve Jellinek +1 312 244-7908 [email protected]

COMMENTARY Macy’s Store Closures Put $6.57 Billion in CMBS at Risk

DBRS Morningstar Perspective Macy’s, Inc.’s recently announced round of store closures could put about $6.57 billion in loans securitized in commercial mortgage- backed securities (CMBS) at risk. DBRS Morningstar Credit Ratings (DBRS Morningstar) identified 50 Macy’s locations that are most at risk of closing because they reported below-average tenant sales and were not among the 150 stores that will receive more than $200 million for renovations and upgrades under Macy’s Growth 150 initiative.

In a February 4, 2020, press release, which came just months after the department-store retailer announced it was closing 30 locations, Macy’s said it plans to shutter an additional 95 stores because of slowing traffic and muted sales. These 125 combined closures represent about 18% of its stores. CMBS exposure to Macy’s as a collateral anchor or noncollateral totals $33.64 billion.

In its statement, Macy’s said that it will close its least productive stores over the next three years and concentrate its financial firepower and talent on the best-performing locations. Although Macy’s did not specify which locations it will be shuttering, Jeff Gennette, Macy’s president, said, “We will focus our resources on the healthy parts of our business, directly address the unhealthy parts of the business, and explore new revenue streams.” The company also announced a new strategic plan called Polaris. This plan includes five major initiatives: organizational changes, store closures, e-commerce enhancements, an expanded loyalty program, and a renewed focus on its private-label brands.

CMBS exposure to Macy’s as a collateral or noncollateral tenant totals $33.64 billion, with about $10.59 billion of that in commercial mortgage-backed securities deals where Macy’s is a collateral tenant. DBRS Morningstar rates $13.35 billion of the more than $33 billion exposure.

We analyzed the most recently available store-level sales and identified 50 locations backing $6.31 billion in loans that have an elevated risk of being closed because the properties’ sales fell below Macy’s average sales of $198 per square foot (psf ) in 2018, and the locations were not part of Macy’s Growth 150. Some of these locations are part of multiple CMBS transactions. Sales figures were unavailable for some locations backing loans.

Losing a Macy’s may not be an immediate death knell for a loan because cash flow could absorb the vacancy. However, if a mall is hit by two or more anchor closures, that’s typically the beginning of a downward spiral. For example, the Bangor Mall in Bangor, , lost two anchor tenants within a 12-month period, including Macy’s in early 2017. The 534,919-square-foot (sf ) regional mall was disposed in 2019 at a loss of $71.5 million, resulting in an 89.4% loss severity.

Further dampening cash flow and increasing losses, it’s common for nonanchor tenants at anchored or shadow-anchored centers to have the right to terminate their leases or reduce rent if an anchor or shadow anchor tenant vacates. In addition, an anchor tenant may have a similar cotenancy provision in its lease based on the continued operations of another anchor tenant.

February 26, 2020 1 Commentary | Macy’s Store Closures Put $6.57 Billion in CMBS at Risk

Loans at Highest Risk The 50 Macy’s identified by DBRS Morningstar to be most at risk are outlined in Table 1 below and can also be found on Viewpoint. The commentary that follows incorporates DealView and Viewpoint analysis, highlighting a few of the highest-risk loans. All loans with exposure to Macy’s as both a collateral and noncollateral tenant can be found here.

Table 1 – Highest Risk Macy’s Loans

Sales Collateral/ Property per Square Deal ID Property Name Location Noncollateral Balance ($) Foot ($)1 MSC 2019-BPR Governor’s Square Tallahassee, FL Collateral 103,498,421 62 DBUBS 2011-LC3 and Commons Dover, DE Collateral 81,597,887 83 CGCC 2014-FL2 South Towne Center Sandy, UT Collateral 139,444,453 88 GSMS 2016-GS2, BACM 2016-UB102, MSC Twenty Ninth Street Boulder, CA Collateral 150,000,000 96 2016-UBS9 BANK 2018-BNK142, BANK 2018-BNK132 Anderson Towne Center , OH Collateral 41,423,663 106 MSC 2019-BPR Beach, VA Collateral 103,498,421 106 SRPT 2014-STAR2 Charlotte, NC Noncollateral 160,563,149 109 COMM 2015-CCRE242, DBWF 2015-LCM2 Lakewood Center Lakewood, CA Collateral 642,183,536 118 WFCM 2018-C46, BANK 2018-BNK12, Fairfax, VA Collateral 170,953,516 120 BANK 2018-BNK132, BBCMS 2018-C22, WFCM 2018-C48 GSMS 2013-GC13 Crossroads Center Saint Cloud, MN Collateral 91,463,954 123 JPMCC 2012-C82 Springfield, MO Collateral 114,840,675 124 WFCM 2017-RC12, CSAIL 2016-C72, Columbus, GA Collateral 73,216,904 131 WFCM 2016-NXS62, SGCMS 2016-C5 JPMCC 2011-C32 Sangertown Square New Hartford, NY Collateral 54,398,173 132 CSAIL 2015-C12, CSAIL 2015-C22, CSAIL Trumbull, CT Collateral 152,300,000 132 2015-C32 WFCM 2016-NXS62, GSMS 2016-GS3, Miami, FL Collateral 150,000,000 140 MSCI 2016-UBS12 JPMCC 2013-C10 Hackensack, NJ Collateral 130,000,000 143 COMM 2013-CR112 Savannah, GA Collateral 145,860,300 145 JPMDB 2017-C5, JPMCC 2016-JP4 Fairlawn, OH Collateral 85,000,000 146 UBSBB 2012-C42 Visalia, CA Collateral 74,000,000 154 JPMCC 2013-LC11 Grand Prairie Premium Outlets Grand Prairie, TX Collateral 111,210,664 156 WFRBS 2014-C24 Bend River Promenade Bend, OR Collateral 26,034,785 158 BBUBS 2012-TFT2 Tucson, AZ Collateral 205,482,000 158 MSBAM 2013-C72 Marlborough, MA Collateral 94,755,630 160 GSMS 2013-GC12 Friendly Center Greensboro, NC Noncollateral 92,239,832 165 MSC 2015-XLF22 Plano, TX Noncollateral 65,738,105 165 JPMBB 2014-C21, JPMBB 2014-C182 The Shops at Wiregrass Wesley Chapel, FL Noncollateral 77,646,479 165 COMM 2012-CR1, COMM 2012-CR2, Crossgates Mall Albany, NY Noncollateral 263,777,947 166 COMM 2012-CR3 MSC 2015-XLF22 Deerborn, MI Noncollateral 39,710,219 166 GSMS 2018-SRP5 Toledo, OH Noncollateral 126,247,766 166 MSBAM 2013-C12 Merrimack Premium Outlets Merrimack, NH Collateral 118,686,145 166 WFCMT 2014-LC162, WFRBS 2014-C212 Montgomery Mall North Wales, PA Noncollateral 100,000,000 166 GSMS 2018-SRP5 Parkway Plaza El Cajon, CA Noncollateral 93,530,056 166 1. From the original deal documents. 2. DBRS Morningstar-rated transaction. Source: Morningstar Credit Ratings, LLC.

February 26, 2020 2 Commentary | Macy’s Store Closures Put $6.57 Billion in CMBS at Risk

Table 1 – Highest Risk Macy’s Loans

Sales Collateral/ Property per Square Deal ID Property Name Location Noncollateral Balance ($) Foot ($)1 CD 2017-CD6, CSMC 2016-NXSR, WFCM Gurnee, IL Noncollateral 258,614,061 168 2016-LC25, CSAIL 2016-C72, WFCM 2016- C36, CD 2017-CD5 COMM 2013-CR9 Northridge Mall Salinas, CA Noncollateral 78,780,000 169 GSMS 2018-3PCK Hoover, AL Noncollateral 164,186,138 171 WFRBS 2012-C92 Chesterfield Towne Center North Chesterfield,VA Collateral 98,290,400 172 UBSBB 2012-C2 Louis Joliet Mall Joliet, IL Noncollateral 85,000,000 173 UBSBB 2012-C2 Crystal Mall Waterford, CT Noncollateral 85,666,035 175 BBUBS 2012-TFT2 Murray, UT Noncollateral 202,000,000 175 GSMS 2018-SRP5 Great Northern Mall North Olmsted, OH Noncollateral 50,143,464 175 MSBAM 2016-C292, MSC 2016-PSQ2, City, OK Noncollateral 310,000,000 175 MSBAM 2016-C282 COMM 2013-CCRE102 Hilo, HI Noncollateral 39,515,591 175 BBUBS 2012-TFT2 Mesquite, TX Noncollateral 160,270,000 175 CSAIL 2015-C32, BACM 2015-UBS72 The Mall of New Hampshire Manchester, NH Noncollateral 150,000,000 176 GSMS 2018-SRP5 Olympia, WA Collateral 90,685,028 179 CGCMT 2017-C4, COMM 2017-COR2, Mall of Baton Rouge, LA Noncollateral 325,000,000 180 WFCM 2017-C41, BANK 2017-BNK72, CGCMT 2017-P82, MSBAM 2017-C34, WFCM 2017-C40 COMM 2012-CR5, COMM 2012-CR4 Eastview Mall and Commons Victor, NY Collateral 210,000,000 189 WFRBS 2013-C15 Kitsap Mall Silverdale, WA Collateral 76,601,984 190 COMM 2012-CCRE5 Parkway Super Center Tukwila, WA Collateral 48,164,595 190 CGCMT 2015-GC29 Parkchester Commercial Bronx, NY Collateral 61,805,370 194 1. From the original deal documents. 2. DBRS Morningstar-rated transaction. Source: Morningstar Credit Ratings, LLC.

BPR Mall Portfolio We are most concerned about the $310.5 million BPR Mall Portfolio loan that backs the single-loan MSC 2019-BPR deal, which DBRS Morningstar does not rate, and is secured by three malls. Two of them have Macy’s with weak sales and are not among those on the company’s Growth 150 list: The Governor’s Square in Tallahassee, , and the Lynnhaven Mall in Virginia Beach, Virginia. The 185,000-sf at Governor’s Square remains vacant, and the collateral, 831,673 sf of a more than 1 million-sf mall, has seen net cash flow decline 12.0% since 2015, while the issuer’s net cash flow was 30.1% less than the 2015 net cash flow. Macy’s, the second-largest tenant and part of the collateral, reported the weakest sales at $62 psf for 2018. In addition, the mall generated mediocre in-line sales of $360 psf. DBRS Morningstar believes the third-largest tenant, JCPenney, is vulnerable as well, reporting 2018 sales of $69 psf, significantly below the company’s 2018 average of $122 psf.

The Macy’s at Lynnhaven Mall generated sales of $106 psf in 2018, which was weak compared with Macy’s 2018 average sales of $198 psf. However, the mall has performed well, generating adequate in-line sales of $489 psf. The borrower has been willing to invest in property renovations, attracting an Apple store that opened in 2014. The nearest Macy’s is 12 miles away at the , in Chesapeake, Virginia, which produced inferior in-line sales of $344 psf. Macy’s sales were not reported for the Chesapeake mall, which backs a specially serviced $64.2 million loan in LBUBS 2006-C6. Macy’s owns its space at , the third mall in the BPR Mall Portfolio. While the store generated sales of $164 psf in 2017, the latest available, the Albuquerque, , store made the company’s Growth 150, easing our concerns. Another positive is that the borrower has been successful in filling two vacant anchor boxes. Round 1 Bowling took over the former Gordmans’ space, while the former Sears space has been divided among several tenants.

February 26, 2020 3 Commentary | Macy’s Store Closures Put $6.57 Billion in CMBS at Risk

Dover Mall and Commons The Macy’s on a ground lease at Dover Mall and Commons generated $83 psf in sales in 2010, the most recent figure available, which is weak compared with Macy’s 2018 average sales of $198 psf. The collateral, 553,854 sf of an 886,334-sf super-regional mall in Dover, , backs an $81.7 million loan in DBUBS 2011-LC3A. In addition to Macy’s, the property is anchored by Boscov’s and JCPenney, which are not part of the collateral, while the noncollateral Sears store closed in 2018. The property generated an adequate 1.26x debt service coverage ratio (DSCR) for the first nine months of 2019 on 82.0% occupancy.

South Towne Center Macy’s is a collateral tenant at South Towne Center, since renamed the Shops at South Town. With a balance of $139.4 million, the loan is 43.2% of the two-loan CGCC 2014-FL2 transaction, not rated by DBRS Morningstar. Macy’s, one of four collateral anchors, occupies 200,000 sf and reported sales of $88 psf for 2014, the most recent available. The property, which is outside of Salt Lake City in Sandy, , was 96.0% occupied in June 2019 and has more than 1.2 million sf, of which nearly 1.1 million sf is collateral. Renovations over the last several years included the addition of Round 1 Bowling and HomeGoods. Declining net cash flow, down 22.8% from the issuer’s net cash flow, left the loan in the hands of the special servicer as a result of its November 2019 maturity default.

Anderson Towne Center Among DBRS Morningstar-rated deals, the Macy’s at the Anderson Towne Center, with $41.4 million in debt split between BANK 2018-BN13 and BANK 2018-BN13, had the lowest sales psf at $106 as of year-end 2017. Macy’s, the largest tenant at the 347,622-sf open-air suburban Cincinnati center, accounts for 32.9% of the space and 6.6% of the issuer’s base rent on a lease that expires in 2029. While three tenants have cotenancy clauses should Macy’s vacate, the sponsor has shown a strong commitment to the property. After acquiring the former underperforming enclosed mall in 2001, the sponsor redeveloped the site at a cost of $37.5 million. The property also benefits from being the largest retail center in the surrounding area, and with a lack of available land, the property has seen little new competition. Further, most competing properties lack strong anchors and are inferior in terms of quality and condition. The loan, which is current, posted a 2.15x DSCR for the first nine months of 2019, and occupancy, which was 94.0% in September 2019, has remained above 92% since 2006.

Continuing Struggles No-moat Macy’s is struggling to stay relevant according to Morningstar, Inc. equity analyst David Swartz’ February 5, 2020, Morningstar Analysis. “While Macy’s operates stores in most top-tier U.S. malls, it also operates hundreds of stores in weaker malls,” noted Swartz. He went on to say that, “It does not need its vast selling space, as department stores have been losing market share to e-commerce (Amazon is reportedly the largest U.S. apparel retailer) and other retailers (outlets, branded stores, specialty stores, discounters).” According to real estate research firm Green Street Advisors, sales at major department stores dropped about 23% in the decade after the 2005 Federated-May merger, which created today’s Macy’s, while mass merchant apparel sales increased nearly 30% and off-price retail nearly doubled. (Morningstar Credit Ratings, LLC is a nationally recognized statistical rating organization; parent Morningstar, Inc. is not an NRSRO and does not issue NRSRO credit ratings.)

Indeed, some of the 50 malls identified as at-risk by DBRS Morningstar, many of which are in secondary and tertiary markets, could be vulnerable to the shifting retail landscape because of low average in-line sales of about $300 psf, which may limit resources enabling them to evolve in the face of competition with strip malls, big-box retailers, community shopping areas, and outlet centers. Once anchors shut down, mall owners can have a difficult time finding retailers large enough to replace them, particularly at weaker locations. Consequently, malls may be hard pressed to backfill space once a Macy’s vacates, putting loans at risk.

February 26, 2020 4 Commentary | Macy’s Store Closures Put $6.57 Billion in CMBS at Risk

The DBRS group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany) (CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(CRA, NRSRO affiliate, DRO affiliate). Morningstar Credit Ratings, LLC is a NRSRO affiliate of DBRS, Inc.

For more information on regulatory registrations, recognitions and approvals of the DBRS group of companies and Morningstar Credit Ratings, LLC, please see: http://www.dbrs.com/research/ highlights.pdf.

The DBRS group and Morningstar Credit Ratings, LLC are wholly-owned subsidiaries of Morningstar, Inc.

© 2020 Morningstar. All rights reserved. The information upon which DBRS ratings and other types of credit opinions and reports are based is obtained by DBRS from sources DBRS believes to be reliable. DBRS does not audit the information it receives in connection with the analytical process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, other types of credit opinions, reports and any other information provided by DBRS are provided “as is” and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. No DBRS entity is an investment advisor. DBRS does not provide investment, financial or other advice. Ratings, other types of credit opinions, other analysis and research issued or published by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness, investment, financial or other advice or recommendations to purchase, sell or hold any securities. A report with respect to a DBRS rating or other credit opinion is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS may receive compensation for its ratings and other credit opinions from, among others, issuers, insurers, guarantors and/or underwriters of debt securities. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT http://www.dbrs.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS RATINGS AND OTHER TYPES OF CREDIT OPINIONS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON http://www.dbrs.com.

February 26, 2020 5