Nearly $300 million of municipal bonds sold 12 years ago to expand Syracuse, New York’s Destiny USA shopping mall were dropped to junk territory on mounting concerns about the shopping center’s position in a challenging retail landscape.
Moody’s Investors Service downgraded the payments-in-lieu of taxes-backed debt issued by the Syracuse Industrial Development Agency in 2007 two notches Wednesday to Ba2 from Baa3, citing declining profits at New York State’s largest mall. The $297 million of outstanding Carousel Center Project PILOT tax-exempt revenue bonds used to finance an 874,200 square-foot-expansion retains on the negative outlook Moody’s first assigned during an April two-notch downgrade to Baa3.
The massive mall, about two miles northwest of downtown Syracuse, first opened in 1990 as Carousel Center on a former landfill site that required extensive environmental cleanup. The Destiny USA expansion debuted in 2011 with the mall adding increasing dining and entertainment options to go along with traditional retail outlets.
The Moody’s downgrade came two weeks after the 2.4 million square-foot-mall operated by Pyramid Management Group averted default by signing a three-year extension with Wells Fargo, who is special servicer for a $430 million of commercial mortgage-backed security loans used for the expansion. Moody’s analyst Joseph Medina noted however in his June 13 report that the mall’s chances of meeting benchmarks in order to secure future loan extensions is uncertain.
“While the loan extension provides time to execute the proposed business plan that has tangible agreements and other likely new tenants in the pipeline over the next few years, Carousel Mall will likely remain challenged to grow margins to meet an annually rising debt service repayment schedule,” Medina wrote.
The three-year loan extension with Wells Fargo on the CMBS loan, which was originally obtained by J.P Morgan Chase Bank, requires meeting new debt yield covenants of 7.5% net operating income in 2020 and 8.5% NOI in 2021. Medina said that the second year requirement will likely require “a substantial amount of equity” to receive the third year of the loan extension.
“We are comfortable with the terms of the Wells Fargo extension and continue to have a strong outlook on Destiny USA.,” Pyramid CEO Stephen Congel said in a statement. “We were surprised with the rating action taken by Moody’s and disagree with their assessment considering the positive outlook and overall performance of the property. This does in no way change our plan, approach or commitment to ensuring the health and longevity of the center for decades to come.”
Pyramid pays fixed annual PILOT payments to fund debt service obligations with the City of Syracuse and Onondaga County waiving their right to the funds. The PILOT bonds are senior to a $300 million subordinate CMBS loan except under “an unlikely” casualty, condemnation, or eminent domain scenario, according to Moody’s. Debt service on the bonds is back-loaded with a gradually ascending 4% annual schedule peaking at $36 million in 2035 before stepping down to $34 million in 2036 at final maturity.
Destiny USA’s occupancy was down to 89% for 2018 from 97% in 2014, according to Moody’s. Anchor tenants Bon Ton and Sports Authority have closed with “growing concern” that its Lord Taylor department store could be up for sale soon. Medina said the mall would struggle if another large anchor tenant closes that isn’t timely replaced and noted that there are expiring leases accounting for 12.5% of annualized rent in 2020.
“The rating is supported by the mall’s strong and established regional market position as a regional super mall with limited direct competition in the Syracuse region, as well as its continued ability to consistently attract visitors from a wider catchment area,” Moody’s wrote. “However, this market position and cashflow predictability has been gradually diminished by online retail over the last several years.”
“If Pyramid really thought the long-term prospects of the mall were good they would have chipped in more equity,” said Rob Arscott, an assistant professor of finance at Syracuse University’s Martin J. Whitman School of Management.
Despite facing retail headwinds from increasing online competition, Medina noted that the mall benefits from limited competition in Central New York. Pyramid also has strong incentive to make debt service payments, according to Medina, in order to avoid a foreclosure and tax lien sale on the massive property.