CMBS Alert More Clicks, Less Bricks--J.C. Penney Company, Inc.’S Announced Store Closures Could Affect $7.29 Billion in CMBS

CMBS Alert More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS

March 8, 2017 Download to Excel

Morningstar Perspective About $7.29 billion in loans securitized in commercial mortgage-backed securities issued since 2010 could be impaired by J.C. Penney Company, Inc.’s recently announced round of store closures. While the company hasn’t released the list of store closures, Morningstar Credit Ratings, LLC identified 39 JCPenney locations that reported below-average tenant sales and are the most at risk of closing. In total, CMBS exposure to JCPenney as an anchor or as a shadow anchor tenant near the actual collateral totals $29.82 billion. In a Feb. 24 statement, the retailer said it plans to shutter 130 to 140 stores and two distribution facilities because of slowing traffic and muted sales, with most of the closures planned for second-quarter 2017. In the announcement, CEO Marvin Ellison said in a written statement, “We must take aggressive action to better align our retail operations for sustainable growth.” According to the company, the stores most at risk of closure either require a significant capital investment or have below-average sales.

CMBS exposure to JCPenney as a collateral tenant totals about $16.43 billion. We also found an additional $13.39 billion in loans exposed to the store as a shadow anchor. We analyzed the most recent available store-level sales in postcrisis deals and identified 39 locations affecting $7.29 billion in loans that have an elevated risk of closure because the property’s sales fell below JCPenney’s average sales of $120 per square foot in 2015, the most recent available. Some of these locations are part of multiple CMBS transactions. The list does not include locations affecting postcrisis loans for which tenant sales figures were unavailable. Additionally, store-level sales are not available for loans issued before 2010.

JCPenney Overlaps with Closing Macy’s and Sears JCPenney’s announcement comes just weeks after Macy’s and Sears’ recently announced store closures, which we reported in our Jan. 19 CMBS Alert. While losing one anchor may not be drastic if cash flow can absorb the loss, two or more anchors leaving can be the beginning of a downward spiral. For example, the Hudson Valley Mall in upstate New York lost anchor stores JCPenney and Macy's within a 12-month period. The January disposition of the 765,465-square-foot mall in Kingston, New York, resulted in $9.4

CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665

million of proceeds, representing an 89.2% discount to the original appraised value and resulting in an 86.1% loss severity. The $48.9 million loan was at one time 17.7% of CFCRE 2011-C1.

Out of the 15 Macy's store closings we identified in our January Alert, 11 properties also have a JCPenney. But only one, the property backing the $91.6 million Great Northern Mall allocated loan in SCGT 2013-SRP1, has exposure to a ground-leased JCPenney store that falls below the retailer’s average 2015 sales. We believe default risk is low, however, because risk is spread among five loans that make up the Starwood Mall Portfolio. Similarly, out of the 23 Sears store closings, nine of the malls have a JCPenney, all of which have posted better-than-average sales. Furthermore, no properties that have a Sears and Macy’s closing also have a JCPenney.

Loans at Highest Risk There were 39 JCPenney stores that reported sales that were less than the company’s 2015 national average, displayed in Appendix 1.

Our biggest concern is the Wyoming Valley Mall loan. With a balance of $76.0 million, the loan is the fifth-largest loan in GSMS 2014-GC18, making up 7.2% of the deal, and reported a debt service coverage ratio of 1.29x for the first nine months of 2016. JCPenney occupies 172,860 square feet and reported sales of $89 per square foot in 2013, the most recent figure available, which were weak compared with JCPenney’s 2015 average sales of $120 per square foot, the most recent available. The property, which is in Wilkes-Barre, Pennsylvania, about 20 miles south of Scranton, was 97% occupied in September and has nearly 910,000 square feet. In addition to JCPenney, whose lease expires in April, the property’s anchors include Macy’s, Bon-Ton, and Sears, all of which are part of the collateral. Additionally, hhgregg announced March 2 that it was closing 88 stores, including the Wilkes-Barre location, which is collateral for the loan.

Separately, the JCPenney at the Muncie Mall in Muncie, Indiana, has one of the weakest sales among stores reporting, at $71 per square foot for the 12-month-period ended Jan. 31, 2014, the most recent reported. The $35.2 million loan amounts to 2.6% of JPMBB 2014-C19. In 2016, we placed the loan on the Morningstar Watchlist because the mall’s owner, Washington Prime Group Inc., categorized the 515,970-square-foot regional mall as a Tier 2 asset, which it defines as malls with lower productivity and modest growth profiles, further heightening our concern. JCPenney occupies 20.5% of the collateral, but contributes just 5.4% of underwritten base rent. The retailer, whose lease expired in January, is still listed on the mall’s website and is one of four

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CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665

department store anchors including Sears, Macy’s, and Carson’s. The property generated a healthy 2.13x debt service coverage ratio on 98% occupancy as of September 2016.

Another property at risk is the 457,199-square-foot regional mall in Indiana, Pennsylvania, about 50 miles east of Pittsburgh, which backs the $15.3 million Indiana Mall loan. JCPenney, occupying 13.7% of the space, reported sales of $102 per square foot for 2012. Since issuance, the property has experienced a drop in both cash flow and occupancy. The mall, which is in a rural area of western Pennsylvania, may continue to struggle with Sears and Kmart as the largest tenants at the property. The two tenants occupy 40.3% of the space and account for about 14% of the rent. While both tenants renewed their leases in 2015, Sears Holdings Corp. has accelerated closures over the past year, and with below-average sales of $90 per square foot for Sears and $120 per square foot for Kmart, both stores are in danger of closing. Bon-Ton rounds out the anchor tenants, and collectively, the four anchors account for 67.1% of the space, making the property much more sensitive to the anchor tenants compared with other malls. The loan, 1.3% of GSMS 2013-GC14, is current and posted a 0.95x debt service coverage ratio for the first nine months of 2016 on 86% occupancy.

Near-Term Lease Expirations In recent years, we have seen a trend of retailers closing poorer performing stores with near-term lease expirations. Ten JCPenney- leased stores with low sales, including the previously noted Wyoming Valley Mall and Muncie Mall, backing $111.2 million in loans, have a lease that expires before year-end 2018. The JCPenney at the Palisades Center in West Nyack, New York, where the retailer’s lease expires in March 2018, may be a potential closure candidate because of low sales and high occupancy costs. The store averaged sales of $79 per square foot as of year-end 2015, the most recent reported, and JCPenney pays occupancy costs of 13.3%, which we consider high for a department store anchor. Although the mall posted sales per square foot of $479 in 2015, the most recent available, it underperformed its competition, which averaged $540 per square foot for 2015, and may lead to trouble filling a potential vacancy. The loan, which backs two pari passu loans with a $388.5 million piece in PCT 2016-PLSD and a $30.0 million piece in JPMDB 2016-C2, reported a 2.61x debt service coverage ratio on 94% occupancy for the first nine months of 2016.

Bifurcated Market and Shifting Landscape We continue to observe a bifurcation in the market where lower-quality, Class B assets, particularly those in secondary and tertiary markets, continue to lose tenants and cash flow, while higher-quality, Class A malls receive ongoing investments from their owners in an effort to broaden their appeal to consumers. Class B properties may not be able to produce a sufficient return on capital to justify continued investment from their owners. Those properties may have more trouble filling anchor spaces, which may stay vacant for an extended period of time. This can lead to further deterioration of sales performance and increased vacancy. 3

CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665

We identified 10 malls on the high-risk list that may be vulnerable to the shifting retail landscape because of low average in-line sales of about $350 per square foot, according to the prospectus supplement, which could limit resources allowing them to evolve in the face of competition from strip malls, big-box retailers, community shopping areas, outlet centers, and e-commerce. Mall owners can have a difficult time finding retailers large enough to replace vacated anchor spaces.

Furthermore, nonanchor tenants at anchored or shadow-anchored retail centers could exercise cotenancy clauses and terminate their leases or pay lower rent if an anchor or shadow anchor tenant vacates. In addition, an anchor tenant may have a similar cotenancy provision in its lease connected to another anchor tenant continuing operations.

The different levels of sponsorship are also concerning. JCPenney has 1,014 full-line department stores as of the end of October 2016. REITs own 291 malls with a JCPenney store as of year-end 2016, leaving more than 700 in the hands of smaller operators who may find it more difficult to backfill any vacancy.

The changing retail landscape is constraining department store growth. Pricing power is limited, said Morningstar, Inc. equity analyst Bridget Weishaar in a February report on Macy’s, “Given that consumers are less brand sensitive in apparel purchases than in the past and will compare the price of a shirt with what they can get from other brands at other stores.” She went on to say that those outside the department store sector are also a threat. “Consumers now seem willing to pay more for healthier food and better or new technologies and appear to be prepared to sacrifice their apparel budget to do so. Department stores have been losing market share, falling to 3.6% from 5.2% of total retail sales during the past five years alone. This implies that department store sales have fallen at a 2% compound annual rate over the past five years, versus general retail sales that grew at a 5% compound annual rate over the same period.” 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.

Clients can access loan-level details for all CMBS loans with JCPenney as one of the five-largest tenants in Excel format by clicking the download icon at the top of page one.

As we will be monitoring these loans, please see our Morningstar DealView® reports in the coming months where property level surveillance, performance, and value analysis will be available at the loan and deal level.

CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665

Appendix 1 – High-Risk JCPenney Loans (1 of 2)

% of Gross Avg Mall Collateral % of Leasable Sales/Sq Ft Deal Property Name Loan Name Tenant City State Allocated Balance ($) Deal Area Lease Expiration ($)

MSC 2012-C4 Capital City Mall Capital City Mall Yes Camp Hill PA 61,106,713 7.4 21.0 11/30/2020 280 GSMS 2014-GC24 Coastal Grand Mall Coastal Grand Mall No Myrtle Beach SC 120,363,744 11.4 N/A N/A 362 JPMBB 2013-C14 Country Club Mall Country Club Mall Yes LaVale MD 24,234,754 2.3 11.0 3/31/20162 147 GSMS 2013-GC13 Crossroads Center Crossroads Center Yes Saint Cloud MN 98,883,983 7.7 21.0 1/31/2021 401 JPMCC 2014-DSTY Destiny USA Phase I Destiny USA Phase I Yes Syracuse NY 300,000,000 69.8 12.0 10/31/2020 541 MSBAM 2014-C17 El Con Center El Con Center Yes Tucson AZ 61,500,000 6.0 25.0 8/31/2021 NAV GSMS 2015-GS1 Glenbrook Square Mall Glenbrook Square Yes Fort Wayne IN 60,000,000 7.4 17.0 5/31/2018 427 SCGT 2013-SRP1 Great Northern Mall1 Starwood Mall Portfolio No North Olmsted OH 91,580,000 12.1 N/A N/A 370 MSBAM 2016-C28 Greenville Mall Greenville Mall Yes Greenville NC 44,616,377 4.7 23.0 2/28/2019 404 GSMS 2016-GS4 Hamilton Place Hamilton Place No Chattanooga TN 41,540,441 2.6 N/A N/A 423 GSMS 2016-GS3 Hamilton Place Hamilton Place No Chattanooga TN 64,288,778 5.7 N/A N/A 423 GSMS 2013-GC14 Indiana Mall Indiana Mall Yes Indiana PA 15,285,529 1.3 13.7 11/30/2020 NAV WFRBS 2013-C15 Kitsap Mall Kitsap Mall No Silverdale WA 77,300,000 7.4 N/A N/A 389 CGCMT 2014-GC21 Maine Mall Maine Mall Yes South Portland ME 125,000,000 12.3 11.0 7/31/2018 598 GSMS 2014-GC22 Maine Mall Maine Mall Yes South Portland ME 110,000,000 11.6 11.0 7/31/2018 598 JPMBB 2014-C25 Mall at Barnes Crossing Mall at Barnes Crossing Yes Tupelo MS 67,000,000 5.7 13.0 3/31/2020 379 WFCM 2014-LC16 Montgomery Mall Montgomery Mall Yes North Wales PA 54,000,000 5.7 14.0 3/15/2022 306 WFRBS 2014-C21 Montgomery Mall Montgomery Mall Yes North Wales PA 46,000,000 3.3 14.0 3/15/2022 306 JPMBB 2015-C28 Mt. Shasta Mall Mt. Shasta Mall Yes Redding CA 31,850,000 2.8 40.0 7/31/2021 358 JPMBB 2014-C19 Muncie Mall1 Muncie Mall Yes Muncie IN 35,219,272 2.6 20.5 1/31/2017 301 JPMBB 2014-C24 North Riverside Park Mall North Riverside Park Mall No North Riverside IL 73,010,200 5.8 N/A N/A 459 JPMBB 2014-C19 Northtowne Mall Gumberg Retail Portfolio Yes Defiance OH 7,190,503 0.5 12.0 3/31/2020 NAV JPMCC 2014-C20 Northtowne Mall Gumberg Retail Portfolio Yes Defiance OH 6,196,332 0.7 12.0 3/31/2020 NAV GSMS 2011-GC3 Oxford Valley Mall Oxford Valley Mall Yes Middletown Township PA 63,713,685 8.2 18.0 8/8/2018 332 JPMDB 2016-C2 Palisades Center Palisades Center Yes West Nyack NY 30,000,000 3.4 8.3 3/31/2018 479 PCT 2016-PLSD Palisades Center Palisades Center Yes West Nyack NY 388,500,000 100.0 8.3 3/31/2018 479 MSC 2011-C3 Park City Center Park City Center Yes Lancaster PA 141,973,590 15.2 20.0 7/31/2020 401 MSBAM 2016-C28 Penn Square Mall Penn Square Mall No Oklahoma City OK 90,000,000 9.4 N/A N/A 618 MSBAM 2016-C29 Penn Square Mall Penn Square Mall No Oklahoma City OK 46,600,000 5.8 N/A N/A 618 MSC 2016-PSQ Penn Square Mall Penn Square Mall No Oklahoma City OK 173,400,000 100.0 N/A N/A 618

N/A - Not applicable. NAV - Not available.

1Macy’s store closing.

2The tenant is still listed on the mall’s website. Note: Average mall sales per square foot are from prospectus supplements. Sources: Morningstar Credit Ratings, LLC and prospectus supplements.

CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665

Appendix 1 (continued) – High-Risk JCPenney Loans (2 of 2)

COMM 2015-DC1 Pinnacle Hills Promenade Pinnacle Hills Promenade Yes Rogers AR 118,747,019 8.4 5.1 1/31/2022 NAV COMM 2015-DC1 Pinnacle Hills Promenade Pinnacle Hills Promenade Yes Rogers AR 117,694,587 8.4 11.0 9/30/2026 NAV BACM 2017-BNK3 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 24.2 6.0 2/28/2022 451 CFCRE 2016-C6 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 36.7 6.0 2/28/2022 451 CFCRE 2016-C7 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 18.5 6.0 2/28/2022 451 CGCMT 2016-C3 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 36.6 6.0 2/28/2022 451 CGCMT 2016-P6 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 21.1 6.0 2/28/2022 451 MSBAM 2016-C32 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 16.8 6.0 2/28/2022 451 WFCM 2016-C37 Potomac Mills Potomac Mills Yes Woodbridge VA 416,000,000 17.7 6.0 2/28/2022 451 CSAIL 2016-C6 Quaker Bridge Mall Quaker Bridge Mall Yes Lawrenceville NJ 66,666,667 8.7 41.0 3/31/2046 697 CGCMT 2016-GC36 South Plains Mall South Plains Mall Yes Lubbock TX 30,000,000 2.6 22.0 7/31/2017 472 CGCMT 2015-GC35 South Plains Mall South Plains Mall Yes Lubbock TX 100,000,000 9.1 22.0 7/31/2017 472 GSMS 2015-GS1 South Plains Mall South Plains Mall Yes Lubbock TX 70,000,000 8.6 22.0 7/31/2022 472 MSBAM 2013-C11 Southdale Center Southdale Center No Edina MN 53,712,252 6.5 N/A N/A 401 MSBAM 2013-C10 Southdale Center Southdale Center No Edina MN 96,759,171 6.9 N/A N/A 401 JPMCC 2014-FL6 Southland Mall Southland Mall Yes Cutler Bay FL 67,500,000 15.4 12.0 11/30/2022 352 CSAIL 2015-C3 The Mall of New Hampshire The Mall of New Hampshire No Manchester NH 100,000,000 7.1 N/A N/A 409 BACM 2015-UBS7 The Mall of New Hampshire The Mall of New Hampshire No Manchester NH 50,000,000 6.7 N/A N/A 409 COMM 2013-CR7 Tifton Plaza Tifton Plaza Yes Tifton GA 7,901,905 0.9 15.0 11/30/2020 NAV SCGT 2013-SRP1 West Covina Mall Starwood Mall Portfolio No West Covina CA 190,760,000 25.1 N/A N/A 394 COMM 2014-CR16 West Ridge Mall & Plaza West Ridge Mall & Plaza No Topeka KS 41,642,720 4.0 N/A N/A 298 CSAIL 2015-C2 Westfield Trumbull Westfield Trumbull No Trumbull CT 33,958,784 2.5 N/A N/A 404 CSAIL 2015-C3 Westfield Trumbull Westfield Trumbull No Trumbull CT 41,162,162 2.9 N/A N/A 404 CSAIL 2015-C1 Westfield Trumbull Westfield Trumbull No Trumbull CT 77,179,054 6.4 N/A N/A 404 CSAIL 2015-C2 Westfield Wheaton Westfield Wheaton Yes Wheaton MD 95,000,000 7.0 13.0 12/31/2019 383 CSAIL 2015-C3 Westfield Wheaton Westfield Wheaton Yes Wheaton MD 97,000,000 6.9 13.0 12/31/2019 383 JPMBB 2014-C21 Westminster Mall Westminster Mall No Westminster CA 52,569,503 4.2 N/A N/A 304 JPMCC 2014-C20 Westminster Mall Westminster Mall No Westminster CA 28,674,274 3.3 N/A N/A 304 JPMDB 2016-C4 Windsor Square Windsor Square No Matthews NC 60,000,000 5.3 N/A N/A NAV GSMS 2014-GC18 Wyoming Valley Mall Wyoming Valley Mall Yes Wilkes-Barre PA 75,960,762 7.2 19.0 4/30/2017 396 CGCC 2014-FL1 Yorktown Center Yorktown Center No Lombard IL 150,000,000 50.8 N/A N/A 353

N/A - Not applicable. NAV - Not available. Note: Average mall sales per square foot are from prospectus supplements. Sources: Morningstar Credit Ratings, LLC and prospectus supplements.

CMBS Alert: More Clicks, Less Bricks--J.C. Penney Company, Inc.’s Announced Store Closures Could Affect $7.29 Billion in CMBS | March 8, 2017 | www.morningstarcreditratings.com | +1 800 299-1665

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