DBRS Morningstar Confirms All Ratings of West Edmonton Mall Property Inc.

DBRS Limited (DBRS Morningstar) confirmed the ratings on the first-mortgage bonds (collectively, the Bonds) issued by West Edmonton Mall Property Inc. as follows:

-- 4.309% First Mortgage 10-Year Interest Only Series B1 Bonds at A (sf)
-- 4.056% First Mortgage 10-Year Amortizing Series B2 Bonds at A (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect the overall stable performance of the transaction, with continued improvement following the negative impact to cash flows amid the Coronavirus Disease (COVID-19) pandemic. As of the March 2023 reporting provided by the issuer, collateral revenues have fully recovered and are now exceeding pre-pandemic levels.

The Bonds were issued in February 2014 with a 10-year loan term and a scheduled maturity in February 2024. As of February 2023, the outstanding balance of the Bonds was $734.3 million and is scheduled to amortize to $723.2 million by the payment date for February 2024. The transaction is secured by West Edmonton Mall (the subject property), a destination retail entertainment complex comprising three components: a two-level super-regional shopping centre containing 2.6 million square feet (sf) of gross leasable area (GLA); a 355-key Fantasyland Hotel; and 557,000 sf of parks and attractions in Edmonton. The property is conveniently located on a 108.2-acre site on the west side of Edmonton, approximately 11 kilometres from the downtown core, with easy access from several major highways including ring road Anthony Henday Drive (Hwy. 216), Yellowhead Trail (Hwy. 16), and Whitemud Freeway (Hwy. 2). Additionally, the property also includes more than 11,600 parking spaces in a decked parking structure, a new parkade, and a leased overflow parking lot.

The sponsor for the subject transaction is Triple Five Properties, Inc. (Triple Five). The Triple Five Worldwide Group of Companies (Triple Five Group) owns and manages several large retail and entertainment complexes including the subject, the Mall of America in Minneapolis, and the American Dream in East Rutherford, New Jersey. In 2021, the lenders for the American Dream project were transferred a 49% stake in both the ownership structure of The Mall of America and the ownership structure of the subject property as collateral for the American Dream financing. As the transferred interest in the West Edmonton Mall ownership structure was not a controlling interest, the transfer was not deemed material to the subject transaction by DBRS Morningstar.

Public news outlets have reported difficulties tied to the financing of American Dream, which opened in 2019. Forbes reported in February 2023 that the American Dream ownership defaulted on an approximately $290 million portion of the outstanding bond financing for American Dream, with Bloomberg reporting in April 2023 that a judge had granted a judgment of $389 million to a group of junior lenders that sued “an entity used to finance the $5 billion mall”. While the news of these financial challenges for the Triple Five Group are noteworthy as they could suggest generally increased risks from the perspective of prospective lenders looking at a refinance proposal, DBRS Morningstar also notes the subject benefits from several mitigating factors including the strong historical performance and the property’s status as a primary retail destination within Edmonton.

According to the March 2023 reporting, the retail portion of the collateral property was 94.4% occupied, in line with the prior year. The property is anchored by Hudson’s Bay Company (representing 6.1% of GLA), Simons (representing 4.6% of GLA), and Starlight Casino (representing 4.3% of GLA), with the earliest lease expiration between the three anchor tenants scheduled in September 2031. Additionally, the property benefits from a diverse tenant roster of more than 800 retailers, restaurants, and service providers, with relatively minor rollover scheduled through the scheduled maturity in February 2024. According to the March 2023 tenant sales report provided, the 954,885 sf of tenants representing less than 15,000 sf which reported sales, the trailing 12 months (T-12) sales (including Apple) were $874 per square foot (psf), compared with YE2022 figure of $843 psf and the YE2021 figure of $681 psf. According to the December 2022 STR report, the hotel component reported T-12 ended December 31, 2022, occupancy, available daily rate, and revenue per available room (RevPAR) figures of 73.2%, $288.39, and $211.05, marginally increasing from 73.1%, $276.98, and $202.47, respectively, at YE2021. The hotel is a dominant performer in the market, as evidenced by the 231.6% RevPAR penetration rate for 2022.

According to the financial statements provided, the T-12 ended March 2023 consolidated net operating income (NOI) was $170.2 million, compared with $165.5 million at YE2022 and the NOI of $138.4 million in the DBRS Morningstar net cash flow figure derived in 2020. The provided statements showed a debt service coverage ratio of 3.22 times (x), up from 3.13x at YE2022. The loan-to-value (LTV) ratio of 44.9%, based on the issuance Bond balances, and the appraised value as of April 2016 of $2.0 billion, is low. Additionally, the LTV implied by the April 2016 value will further decline to 36.1% by maturity, suggesting significant cushion against value volatility that could result from the increase in capitalization rates over the last several years. The strong performance metrics and low exit LTV suggest the sponsor should be able to secure replacement financing, but the previously outlined challenges within Triple Five Group’s portfolio could compound the timing issues experienced across the sector for commercial property owners seeking financing.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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 notes that this press release was amended on June 8, 2023, to reflect updates to certain figures and commentary contained therein. For more information, see the associated correction press release on dbrsmorningstar.com.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023;
https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Legal Criteria for Canadian Structured Finance (June 22, 2022; https://www.dbrsmorningstar.com/research/398729)

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