CMBS Alert

Macys Announced Store Closures Turns Up the Heat on $3.64

Billion in CMBS
Aug. 17, 2016

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Morningstar Perspective
About $3.64 billion in loans securitized in commercial mortgage-backed securities issued since 2010 could be impaired by Macys,
Inc.s recently announced round of store closures. Morningstar Credit Ratings, LLC identified 28 Macys locations that reported
below-average tenant sales and are the most at risk of closing. In total, CMBS exposure to Macys as an anchor or as a shadow
anchor tenant near the actual collateral totals $28.49 billion. In an Aug. 11, 2016, statement, which came just months after the
department-store retailer closed 36 locations, the retailer said it plans to shutter an additional 100 stores because of slowing traffic
and muted sales. In the statement, Macy's said that it will concentrate its financial firepower and talent on the best-performing
locations. Although Macys did not specify which locations it will be shuttering, Jeff Gennette, Macys president, said that, while
the stores may be cash flow positive, the closing locations do not yield an adequate return on investment.
CMBS exposure to Macys as a collateral tenant totals about $7.13 billion. We also found an additional $21.36 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
28 locations backing $3.64 billion in loans that have an elevated risk of being closed because the propertys sales fell below Macys
average sales of $169 per square foot in 2014, the most recent available. Some of these locations are part of multiple CMBS
transactions. There were some locations backing postcrisis loans for which sales figures were unavailable. Additionally, store-level
sales are not available for loans issued before 2010.
Losing a Macys may not be an immediate death knell for a loan, as 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 Hudson Valley Mall in upstate
New York lost two anchor tenants within a 12-month period, including Macys in the first quarter of 2016. The 765,465-square-foot
regional mall is now in foreclosure. Typically, defaults of CMBS loans secured by regional malls lead to large losses. Morningstar
expects a $32.4 million loss on the $49.2 million Hudson Valley Mall loan.

CMBS Alert: Macys Announced Store Closures Turns Up the Heat on $3.64 Billion in CMBS | Aug. 17, 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Further dampening cash flow and increasing losses, its 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.
Loans at Highest Risk
There were 28 Macys that reported sales that were less than the companys 2014 national average, displayed in Table 1 below.
Table 1 Highest Risk Macys Loans
Deal ID

Property Name

City

State

Property Balance ($)

Debt Service
Coverage
Ratio (x)

COMM 2014-CR17
DBUBS 2011-LC3A
CGCC 2014-FL2
COMM 2013-CR7
GSMS 2013-GC12
COMM 2015-CR24
DBWF 2015-LCM
JPMBB 2014-C18
GSMS 2013-GC13
JPMCC 2012-C8
JPMCC 2011-C3
CSAIL 2015-C1
CSAIL 2015-C2
CSAIL 2015-C3
WFCM 2014-LC16
WFRBS 2014-C21
MSC 2015-XLF2
SGCMS 2016-C5
CGCMT 2016-GC36
GSMS 2015-GS1
COMM 2013-CR11
COMM 2013-CR12
UBSBB 2012-C4
DBUBS 2011-LC2A
BBUBS 2012-TFT
JPMCC 2013-LC11
WFRBS 2014-C24
BBUBS 2012-TFT
WFCM 2015-C31
MSBAM 2012-CKSV
GSMS 2012-GC6
MSBAM 2016-C28
MSBAM 2016-C29
BACM 2015-UBS7
CSAIL 2015-C3
MSBAM 2013-C12

Cottonwood Mall
Dover Mall and Commons
South Towne Center
Lakeland Square Mall
Friendly Center
Lakewood Center
Lakewood Center
The Shops at Wiregrass
Crossroads Center
Battlefield Mall
Sangertown Square
Westfield Trumbull
Westfield Trumbull
Westfield Trumbull
Montgomery Mall
Montgomery Mall
Starwood National Mall Portfolio
Peachtree Mall
Glenbrook Square
Glenbrook Square
Oglethorpe Mall
Oglethorpe Mall
Visalia Mall
Willowbrook Mall
Town East Mall
Grand Prairie Outlets
Bend River Promenade
Tucson Mall
Palouse Mall
Sunvalley Shopping Center
Meadowood Mall
Penn Square Mall
Penn Square Mall
The Mall of New Hampshire
The Mall of New Hampshire
Merrimack Premium Outlets

Albuquerque
Dover
Sandy
Lakeland
Greensboro
Lakewood
Lakewood
Wesley Chapel
Saint Cloud
Springfield
New Hartford
Trumbull
Trumbull
Trumbull
North Wales
North Wales
Plano
Columbus
Fort Wayne
Fort Wayne
Savannah
Savannah
Visalia
Houston
Mesquite
Grand Prairie
Bend
Tucson
Moscow
Concord
Reno
Oklahoma City
Oklahoma City
Manchester
Manchester
Merrimack

NM
DE
UT
FL
NC
CA
CA
FL
MN
MO
NY
CT
CT
CT
PA
PA
TX
GA
IN
IN
GA
GA
CA
TX
TX
TX
OR
AZ
ID
CA
NV
OK
OK
NH
NH
NH

101,329,710
87,432,159
147,000,000
65,963,828
99,524,796
115,481,372
285,481,372
48,175,899
100,224,689
123,211,103
60,554,139
77,179,054
33,958,784
41,162,162
54,000,000
46,000,000
77,981,960
23,703,430
102,000,000
60,000,000
90,000,000
60,000,000
74,000,000
197,764,022
160,270,000
119,459,652
26,100,000
205,482,000
23,075,000
177,809,779
117,274,341
310,000,000
46,600,000
50,000,000
100,000,000
127,702,852

1.97
1.45
2.74
1.59
2.39
2.03
2.03
1.49
1.84
2.51
1.03
4.76
4.86
4.86
2.55
2.55
5.48
1.83
2.01
2.01
2.71
2.71
3.57
1.71
3.41
3.12
1.72
3.13
1.49
2.15
1.53
2.73
4.10
2.46
2.46
1.87

Owned/Leased/Ground
Lease

Owned
Ground Lease
Leased
Owned
Ground Lease
Ground Lease
Ground Lease
Owned
Ground Lease
Leased
Leased
Leased
Leased
Leased
Ground Lease
Ground Lease
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Ground Lease
Leased
Ground Lease
Owned
Owned
Owned
Owned
Owned
Leased

* From the original deal documents.

Source: Morningstar Credit Ratings, LLC

2
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

Sales per
Square Foot
($)*

76
83
88
89
115
118
118
118
123
124
132
132
132
132
133
133
133
139
140
140
145
145
154
154
155
156
158
158
159
160
163
164
164
165
165
166

CMBS Alert: Macys Announced Store Closures Turns Up the Heat on $3.64 Billion in CMBS | Aug. 17, 2016 | www.morningstarcreditratings.com | +1 800 299-1665

The loan of greatest concern is backed by the Cottonwood Mall in Albuquerque, New Mexico, where Macys has the weakest sales
among stores reporting. The $101.3 million loan amounts to 8.6% of COMM 2014-CR17 While the former 42,000-square-foot Sports
Authority space remains vacant, the collateral, which is 410,452 square feet a more than 1 million-square-foot mall, has enjoyed
strong cash flow, reporting a 2.05x DSCR for 2015 on 89% occupancy. Macys, the second-largest tenant and not part of the
collateral, reported sales of $76 per square foot for 2013, the latest available. We are concerned that there is a competing Macys,
about 13 miles from the property at the Coronado Center. Additionally, Sears and JCPenney, other mall anchors and troubled
national retail chains, are worth noting as both have been closing stores in recent years amid slumping sales. Lastly, more than 30%
of the tenants for the collateral space have less than 24 months left on their leases.
Separately, the Macys on a ground lease at Dover Mall and Commons generated $83 per square foot in sales in 2010, the most
recent figure available, which were weak compared with Macy's 2010 average sales of $162 per square foot. In addition, the mall
generated mediocre in-line sales of $310 per square foot. The collateral, 553,854 square feet of an 886,334-square-foot superregional mall in Dover, Delaware, backs an $87.4 million loan in DBUBS 2011-LC3A. In addition to Macys, the property is anchored
by Sears, Boscov's, and JCPenney; the last two are not part of the collateral. The property generated a healthy 1.45x DSCR on 95%
occupancy at year-end 2015.
Macys owns its space at the Lakeland Square Mall. With a balance of $66 million, the loan is the second largest in COMM 2013CR7, making up 7.5% of the deal, and reported a 1.59x DSCR for the first three months of 2016. Macys, one of three noncollateral
tenants, occupies 101,113 square feet and reported sales of $89 per square foot for 2012, the most recent available. The property,
which is in central Florida about 35 miles east of Tampa, was 89% occupied in March and has more than 883,000 square feet, of
which nearly 536,000 square feet is collateral. After losing tenant Sports Authority earlier this year, the property will gain clothing
retailer H&M when it opens a 20,000-square-foot store this fall, according to the Tampa Bay Business Journal. Like Cottonwood Mall
and Dover Mall and Commons, Sears and JCPenney are also tenants at the property. A positive is that of the four Macys within 47
miles of the mall, the closest two properties, about 30 miles away, are not in the malls primary market.
Continuing Struggles
Strategic store closures are necessary and positive according to Morningstar, Inc. senior equity analyst Bridget Weishaars Aug. 11,
2016, Analyst Note. Macys needs to align the historic store base with modern day e-commerce trends, and the latest round of
announced store closures will go a long way to improving profitability levels and focusing investments on higher return
opportunities, noted Weishaar. She then said, however, that Macys lacks a moat and is in a sector experiencing secular decline.
3
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

CMBS Alert: Macys Announced Store Closures Turns Up the Heat on $3.64 Billion in CMBS | Aug. 17, 2016 | www.morningstarcreditratings.com | +1 800 299-1665

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 28 malls could be vulnerable to the shifting retail landscape because of low average in-line sales of about $300
per square foot, 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.
We are also concerned with sponsorship. Macys has 690 full-line department stores (including Bloomingdale's) as of secondquarter 2016, and REITs own about 400 stores. This means nearly 300 are in the hands of smaller operators who will find it more
difficult to backfill any vacancy.
Separately, Macys and other department stores are also struggling to deal with a shifting retail landscape. Indeed, Coach, Michael
Kors, and Ralph Lauren all recently said they were pulling out of, or reducing inventory in, department stores. Although they
represent just a small portion of overall department-store sales, these brands are often big traffic drivers for shoppers.

Clients can access loan-level details for all CMBS loans with Macys as a tenant 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.

4
2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.

CMBS Alert: Macys Announced Store Closures Turns Up the Heat on $3.64 Billion in CMBS | Aug. 17, 2016 | www.morningstarcreditratings.com | +1 800 299-1665

Morningstar Credit Ratings, LLC

CMBS Surveillance
Steve Jellinek
Vice President Structured Finance Research
+1 267 960-6009
Edward Dittmer, CFA
Vice President CMBS Analytical Services
+1 267 960-6043
Lea Overby
Managing Director Structured Finance Research
+1 646 560-4583

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2016 Morningstar Credit Ratings, LLC. All Rights Reserved. Morningstar Credit Ratings, LLC is a wholly owned subsidiary of Morningstar, Inc.
and is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO). Morningstar
and the Morningstar logo are either trademarks or service marks of Morningstar, Inc.