DBRS Morningstar Confirms Ratings on All Classes of Houston Galleria Mall Trust 2015-HGLR, Changes Trends to Stable

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-HGLR (the Certificates) issued by Houston Galleria Mall Trust 2015-HGLR (the Issuer) as follows:

-- Class A-1A1 at AAA (sf)
-- Class A-1A2 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class X-CP at BB (high) (sf)
-- Class X-NCP at BB (high) (sf)
-- Class E at BB (sf)

DBRS Morningstar changed the trends for all classes to Stable from Negative.

The rating confirmations and Stable trends reflect the relatively stable cash flows for the underlying collateral as compared with the uncertainty driven by the Coronavirus Disease (COVID-19) pandemic that drove the rating actions taken at last review when DBRS Morningstar changed the trends on all classes to Negative.

The Certificates are backed by a $1.05 billion component of a $1.2 billion, 10-year, fixed-rate, interest-only (IO) mortgage loan. The remaining $150.0 million pari passu companion loan was securitized in the JPMBB 2015-C28 transaction, which is also rated by DBRS Morningstar.

The loan is secured by the fee interest in a 1.2 million-square-foot (sf) portion of a 2.1 million-sf enclosed, super-regional mall in Houston, about 10 miles west of the central business district. The tenant roster includes approximately 400 retailers and restaurants, along with noncollateral tenants, including Macy’s, Nordstrom, Neiman Marcus, and Saks Fifth Avenue (Saks). Macy’s and Nordstrom own their sites and spaces, while Neiman Marcus and Saks own their respective improvements and are subject to ground leases. All anchor boxes at the property are occupied and operating as of September 2021.

In June 2021, the loan was added to the servicer’s watchlist for delinquent real estate taxes, which the servicer noted were more than 60 days past due. The loan remains on the servicer’s watchlist as of the September 2021 reporting for the same reason. Real estate taxes are not escrowed for this loan, a common structure for a well-capitalized borrower with a loan of this size. The servicer’s commentary regarding the status of the tax payments are limited to a comment from June 2021 that noted outstanding taxes due to the county of $7.7 million. According to the financial reporting for year-end (YE) 2020, the total real estate tax expense was approximately $24.2 million. DBRS Morningstar has requested clarification regarding the delinquent taxes from the servicer but has not yet received a response at the time of this release.

A rent roll dated June 30, 2021, showed that the collateral was 86.4% occupied, compared with the March 31, 2021, occupancy rate reported by the servicer of 81.0%, and the YE2019 occupancy rate of 85.6%. Excluding the noncollateral and ground-leased anchor tenants, the largest tenants are Life Time Fitness (6.5% of the collateral net rentable area (NRA)), Forever 21 (2.3% of the NRA), and H&M (1.9% of the NRA). No other tenant accounts for more than 2.0% of the NRA.

The servicer reported the YE2020 net cash flow (NCF) of $113.2 million had declined slightly when compared with the YE2019 NCF of $117.3 million, but DBRS Morningstar notes the 2020 figure remains in excess of the Issuer’s figure of $100.1 million. This is particularly noteworthy given the fact that the mall was closed for approximately one month between March and April 2020 and was open in a limited capacity for the remainder of the year through early 2021.

The sponsors for the loan are Simon Property Group (SPG) and Institutional Mall Investors (IMI). SPG, considered the largest REIT in the United States, is also the loan’s guarantor. IMI is a regional shopping center investment platform that is ultimately co-owned by Miller Capital Advisory, Inc. (MCA), which acts as an investment manager for IMI, and CalPERS, the largest public pension fund in the country. IMI owns or has interest in roughly 19 million sf of retail gross leasable area, as well as one million sf of office space. IMI acquired ownership interest in the subject in 2001, while SPG acquired ownership interest in early 2002.

The DBRS Morningstar NCF was based on the latest servicer-reported NCF figure with an adjustment in consideration of ongoing collateral performance expectations, as well as expectations regarding tenant movement and sales performance. The resulting NCF figure was $110.9 million and DBRS Morningstar applied a cap rate of 6.5%, which resulted in a DBRS Morningstar value of $1.7 billion, a variance of -32.2% from the appraised value of $2.5 billion at issuance. The DBRS Morningstar value implies an LTV of 70.3% compared with the LTV of 47.7% 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 regional mall properties, reflecting the property’s above-average quality and dominance in the Houston area.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 4.50% to account for property quality and market fundamentals.

The DBRS Morningstar ratings assigned to classes C, D, and E are lower than the results implied by the LTV Sizing Benchmarks. The variances are warranted given DBRS Morningstar’s concerns regarding near to moderate term performance challenges for the collateral mall amid the coronavirus pandemic.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-CP and X-NCP are interest-only (IO) certificates that reference 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is the North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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