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11 Sep 2019
New York, September 11, 2019 -- Moody's Investors Service ("Moody's") affirms the Ba2 on $113.8 million Kapkowski Road Landfill Reclamation Improvement District Project Bonds, issued by the New Jersey Economic Development Authority. The outlook has been revised to positive from stable.
The Ba2 rating reflects the healthy cash flow from the Mills at Jersey Gardens Mall, whose payment-in-lieu-of-tax (PILOT) secures the bonds. Broad changes in consumer behavior shifting away from traditional brick and mortar to online retail platforms have not impacted the financial performance of mall property. Tenant sales remain strong year-over-year which is underpinned by strong property management by JG Elizabeth II, LLC (JGE II) as a wholly owned subsidiary of Simon Property Group, L.P. (Senior Unsecured, A2, Stable). The mall has a diverse and stable retail tenant base and an accessible location adjacent to the New Jersey Turnpike and Newark-Liberty International Airport, with direct transportation links to New York City. The credit is challenged by the absence of a debt service reserve fund in lieu of an advancing agreement by a Midland Loan Services (NR) to provide timely payment of debt service.
The PILOT payments commenced August 2004 and will terminate on the date of the final payment of the bonds in February 2031. The FY 2018 PILOT payment is just below $3.0 million quarterly, totaling $11.9 million annually. PILOT payments increase by 10% every 5 years, next increase is scheduled for May 1, 2021. Moody's calculates 5.67x coverage of the PILOTs pledged to debt service in FY 2018, up from 4.60x in FY 2017 and 4.14x in FY 2016. The mall has a $350 million interest-only 3.83% mortgage note with Wells Fargo, subordinate to the PILOTs. The mortgage is secured by the investment property and related rents and leases, maturing November 1, 2020. Simon does not expect difficulty in refinancing.
The positive outlook is based on our expectation that Jersey Gardens will continue to outperform the broader brick-and-mortar retail segment, resulting in growth in revenues cashflows to support the PILOTs and underlying mortgage. The outlook also factors in the ability to refinance the mortgage in 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Demonstration that new market entrants to the competitive landscape result in no sustained material impact on cashflows
- Refinancing of the mortgage note due in 2020
- Long term improvement in the liquidity position and/or the creation of a debt service reserve fund with adequate funding
- Shift in industry conditions favoring brick-and-mortar retail or tenants that are less exposed to competition
FACTORS THAT COUL LEAD TO A DOWNGRADE
- A change in competitive market position or tax environment which results in lower occupancy rates or sales
- A decline in financial performance such that PILOT coverage falls below 2.0x on a sustained basis
The bonds are payable solely from PILOTs made by JGE II to the City of Elizabeth, which has assigned the payment to the bondholders' trustee. If there is a shortfall of PILOT payments, which are remitted quarterly to a trustee, the PILOT's total value will not be accelerated. The Landfill Improvement Act of NJ provides for imposition of a special assessment as a back-up taxing mechanism to the lien of PILOTs. The city's Assessment Ordinance prescribes the lien on the special assessment as $180 million and requires it to be pay so long as the bonds are outstanding, or 30 years, whichever is less. There is no explicit rate covenant but the deal is structured so that the fixed PILOT payments provide sum sufficient debt service coverage.
JG Elizabeth II, LLC was formed for the purpose of operating and holding the Mills at Jersey Gardens for long-term investment and is a wholly-owned subsidiary of Simon Property Group, L.P. JG Elizabeth II, LLC is responsible for quarterly PILOTs to an affiliate, New Jersey Metromall Urban Renewal LLC, who is legally required to pay the PILOTs to the trustee. Simon replaced Glimcher Realty as owner and operator of the mall in January 2015.
The Mills at Jersey Gardens is an enclosed two-level, value-oriented fashion and entertainment mega-mall located in Elizabeth, New Jersey with a gross leasable area of approximately 1.3 million square feet. It is located approximately three miles from Newark International Airport and 15 miles from Manhattan at Exit I3A of the New Jersey Turnpike in an urban enterprise zone with a reduced sales tax rate. Advertised as "New Jersey's Largest Outlet Mall," Jersey Gardens has over 200 stores and is located in northern New Jersey and the New York City metro area. Construction was completed in late 1999. Jersey Gardens is anchored by sixteen major retailers: Gap Factory, Nike Factory Store, Old Navy Outlet, Tommy Hilfiger, Forever21, Camile La Vie, Century 21 Department Store, Cohoes, Marshalls, Saks Fifth Avenue OFF 5TH, Neiman Marcus Last Call, Burlington, Bed Bath & Beyond, VF Outlet, and Modell's Sporting Goods.
The principal methodology used in these ratings was Generic Project Finance published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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