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 anchor tenant 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, Maine, 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 retail 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 Dover Mall 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 Cincinnati, OH Collateral 41,423,663 106 MSC 2019-BPR Lynnhaven Mall Virginia Beach, VA Collateral 103,498,421 106 SRPT 2014-STAR2 Northlake Mall 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, Fair Oaks Mall 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 Battlefield Mall Springfield, MO Collateral 114,840,675 124 WFCM 2017-RC12, CSAIL 2016-C72, Peachtree Mall 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 Westfield Trumbull Trumbull, CT Collateral 152,300,000 132 2015-C32 WFCM 2016-NXS62, GSMS 2016-GS3, The Falls Miami, FL Collateral 150,000,000 140 MSCI 2016-UBS12 JPMCC 2013-C10 The Shops at Riverside Hackensack, NJ Collateral 130,000,000 143 COMM 2013-CR112 Oglethorpe Mall Savannah, GA Collateral 145,860,300 145 JPMDB 2017-C5, JPMCC 2016-JP4 Summit Mall Fairlawn, OH Collateral 85,000,000 146 UBSBB 2012-C42 Visalia Mall 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 Mall Tucson, AZ Collateral 205,482,000 158 MSBAM 2013-C72 Solomon Pond Mall Marlborough, MA Collateral 94,755,630 160 GSMS 2013-GC12 Friendly Center Greensboro, NC Noncollateral 92,239,832 165 MSC 2015-XLF22 The Shops at Willow Bend 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 Fairlane Town Center Deerborn, MI Noncollateral 39,710,219 166 GSMS 2018-SRP5 Franklin Park Mall 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 Mills 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 Riverchase Galleria 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 Fashion Place 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, Penn Square Mall Oklahoma City, OK Noncollateral 310,000,000 175 MSBAM 2016-C282 COMM 2013-CCRE102 Prince Kuhio Plaza Hilo, HI Noncollateral 39,515,591 175 BBUBS 2012-TFT2 Town East Mall 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 Capital Mall Olympia, WA Collateral 90,685,028 179 CGCMT 2017-C4, COMM 2017-COR2, Mall of Louisiana 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, Florida, and the Lynnhaven Mall in Virginia Beach, Virginia. The 185,000-sf Sears 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.