DBRS Morningstar Assigns Ratings to WP Glimcher Mall Trust 2015-WPG, Places Certain Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2015-WPG (the Certificates) issued by WP Glimcher Mall Trust 2015-WPG as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X at A (sf)
-- Class C at A (low) (sf)
-- Class PR-1 at BBB (low) (sf)
-- Class SQ-1 at BBB (low) (sf)
-- Class PR-2 at BB (sf)
-- Class SQ-2 at BB (low) (sf)
-- Class SQ-3 at B (low) (sf)

The trends for Classes A, B, X, and C are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

DBRS Morningstar has also placed Classes PR-1, SQ-1, PR-2, SQ-2, and SQ-3 Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral as well as the concern surrounding Washington Prime Group’s (WPG) overall financial position.

These Certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 22, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centres. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot will be the most affected.

LOAN/PROPERTY OVERVIEW
This transaction is backed by two uncrossed, fixed-rate, interest-only (IO) mortgage loans totalling $200.0 million. The loans are secured by three senior pari passu A notes totalling $95.0 million on the fee-simple interest in Scottsdale Quarter, a 541,386 square-foot (sf) mixed-use retail centre in Scottsdale, Arizona, and a $105.0 million loan on a portion of the fee and leasehold interest in Pearlridge Center, a 1.14 million-sf super-regional mall in Aiea, Hawaii, the state’s largest enclosed shopping centre. The trust loans are each paired with two senior companion loans of $70.0 million and $120.0 million, respectively, which were securitized in later transactions. The sponsors for both loans are WPG, which is the successor sponsor to Glimcher Realty Trust, and O’Connor Capital Partners. Both properties are managed by WPG.

The Pearlridge Center loan served to refinance existing debt, return $47.0 million of equity to the sponsor, and create a new joint venture with Glimcher Realty Trust (now WPG) having a 51% share and O’Connor Capital Partners acquiring a 49% share. The mall is considered a Class B mall in a strong location. The property is located 10 miles from downtown Honolulu in a densely populated area with other commercial developments. Major tenants include Macy’s, Sears (on a ground lease), Bed Bath & Beyond, and Consolidated Theatres Pearlridge. The mall was constructed in two phases, in 1972 and 1974, and has an unconventional property layout with two separate buildings that are joined together by a monorail system. In addition, there is an office building on site that is part of the loan collateral.

The Scottsdale Quarter loan served to refinance existing debt and recapitalized a joint venture with WP Glimcher and O’Connor Capital Partners. Additionally, the sponsor invested $16.6 million of cash equity with the recapitalization. The property is a Class A, mixed-use, open-air lifestyle centre, with office space, located 17 miles northeast of Phoenix in the affluent Kierland neighbourhood of north Scottsdale. The collateral consists of 175,875 sf of office space with the remainder of the property comprising in-line retail space and a theater box. Kierland is a strong retail market with the Kierland Commons Center across Scottsdale Road and nearby luxury hotels and golf courses. The area is a prime shopping destination in the Scottsdale area with the region’s dominant mall, Scottsdale Fashion Square, located nine miles south of the subject. Major tenants include H&M, Apple, Pottery Barn, and Restoration Hardware in the retail portion of the collateral. Starwood Hotels & Resorts is the largest office tenant. The mall was constructed in two phases from 2009 to 2010. A third phase of development, which was under way at issuance and is not part of the collateral, was completed and contains residential units, hotel rooms, and more mixed-use space including 130,000 sf of office and 96,000 sf of ground-floor retail.

Historic occupancy and financial performance at both properties have been strong. The reported 2019 net cash flow (NCF) for Pearlridge Center and Scottsdale Quarter were reported at $22.7 million and $15.6 million, respectively. This represents a debt service coverage ratio of 2.82 times (x) and 2.64x, respectively. However, in mid-March 2020, malls and small shops were closed in response to the coronavirus pandemic. The Pearlridge Center and Scottsdale Quarter were both temporarily closed in March and reopened in early May. Pearlridge Center closed for a second time in late August after the governor of Hawaii enacted a Stay-at-Home-Order for Oahu and closed the island’s tourism-related industries. The order further delayed the reopening date for the tourism sector throughout most of September but a tiered re-opening schedule has since been adopted that will allow the subject to operate at limited capacity.

The borrower submitted a request for relief and forbearance for both loans because of cash flow concerns amid the pandemic; however, both requests were withdrawn. Both loans were added to the servicer’s watchlist in May because of coronavirus concerns, but were removed from the watchlist shortly afterward. The loans remain current in debt service payments with no delinquencies. However, lease renewals in the next 12 months could pose a problem for Scottsdale Quarter because of lingering coronavirus effects. The property lost its second-largest tenant, iPic Theaters (8.2% of net rentable area (NRA)) at the beginning of 2020 because of a financial restructuring by the tenant’s parent company and, according to the June 2020 rent roll, tenants representing 19.0% of the NRA are scheduled to roll in the next 12 months. The property was 73.0% occupied as of June 2020.

DBRS Morningstar derived the NCFs using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figures were $22.3 million for Pearlridge Center and $13.8 million for Scottsdale Quarter, and DBRS Morningstar applied a cap rate of 7.25% for both properties, which resulted in a pre-coronavirus DBRS Morningstar Value of $307.0 million for Pearlridge Center and $191.0 million for Scottsdale Quarter, a variance of 28.2% and 54.4% from the appraised values of $427.5 million and $351.0 million, respectively, at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 73.3% for Pearlridge Center and 86.4% for Scottsdale Quarter compared with the LTVs of 52.6% and 47.0%, respectively, on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the collateral’s high property quality in developed retail markets.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 4.0% for Pearlridge Center and 1.0% for Scottsdale Quarter to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and/or increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt through Class SQ-3 exceeded the value under the Coronavirus Impact Analysis and therefore DBRS Morningstar presumes that the economic stress from the coronavirus had affected the class.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Class SQ-2 to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

Class X is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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