Morningstar DBRS Confirms Credit Ratings on All Classes of WP Glimcher Mall Trust 2015-WPG

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-WPG 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)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction since Morningstar DBRS’ last rating action in January 2023. Pearlridge Center (Prospectus ID#1, 52.5% of the pool) reported an annualized Q3 2023 net cash flow (NCF) of $21.1 million, in line with issuance levels, despite occupancy declining to 70.4% as of September 2023. Scottsdale Quarter (Prospectus ID#2, 47.5% of the pool), following a period of positive leasing momentum in 2021 and 2022, has exhibited marked NCF improvement, with an annualized Q3 2023 NCF of $21.4 million, well above the issuance NCF of $13.6 million. Morningstar DBRS updated its loan-to-value (LTV) sizings to reflect the loans’ current performance, with the results of the analysis supporting the credit rating confirmations with this review.

This transaction is backed by portions of the senior debt and all of the subordinate debt secured by Scottsdale Quarter, a 541,386-square-foot (sf) mixed-use retail center in Scottsdale, Arizona, and Pearlridge Center, a 1.14 million-sf super-regional mall in Aiea, Hawaii, the state’s largest enclosed shopping center. Both properties are managed by Washington Prime Group (WPG). In October 2021, WPG emerged from bankruptcy following significant debt reductions and a corporate restructuring, which included the majority stake in its ownership being transferred to Strategic Value Partners (Strategic).

Pearlridge Center is an enclosed center, originally built in 1972 and located just north of Pearl Harbor. The mall is anchored by Macy’s (18.4% of the net rentable area (NRA)), lease expiration in February 2027). Major vacancies include a vacant ground-leased anchor pad that was formerly occupied by Sears, which closed in April 2021 and a vacant box representing 5.7% of the NRA that was previously leased to Bed Bath & Beyond prior to the parent company’s bankruptcy filing in 2023. Occupancy at the subject property declined to 70.4% according to the September 2023 rent roll, from 91.5% at YE2020, and the loan is currently being monitored on the servicer’s watchlist. Strategic has assumed the Sears lease and continues to work with WPG to evaluate leasing opportunities. According to the servicer, there are two prospective tenants that have expressed interest in leasing the entirety of the space.

The loan reported an annualized NCF of $21.1 million (with a whole loan debt service coverage ratio (DSCR) of 2.62 times (x)) according to financials for the trailing nine months ended September 30, 2023, in line with the YE2022 NCF of $20.1 million (whole loan DSCR of 2.49x) and the YE2021 NCF of $22.7 million (whole loan DSCR of 2.81x), and surpassing the Morningstar DBRS NCF of $19.3 million derived in 2020. When adjusting for the loss of Bed Bath & Beyond’s rent following its departure and in the absence of any additional leasing, Morningstar DBRS estimates the loan’s NCF is likely to decline to approximately $19.7 million, with an implied whole loan DSCR of 2.45x. According to the August 2023 tenant sales report, in-line tenants reported sales of approximately $556 per square foot (psf), with same-store year-over-year growth of 3.2% from August 2022. The downward trend in occupancy since 2020 remains Morningstar DBRS’ primary concern. However, the mall’s stable sales figures and cash flow, along with the prospective leasing activity, are encouraging signs ahead of the loan’s June 2025 maturity date.

Scottsdale Quarter is a Class A, mixed-use, open-air lifestyle center 17 miles northeast of Phoenix, Arizona, in the affluent Kierland neighborhood of north Scottsdale. The collateral includes an office component representing 32.5% of the NRA. The two largest tenants at the property are both office users, Starwood Hotels & Resorts (14.8% of NRA, lease expiration February 2027) and co-working tenant Spaces (8.7% of NRA, lease expiration December 2033). Major retail tenants include Landmark Theatres, Restoration Hardware, and Forever 21. Occupancy declined to 74.4% in September 2021 following the departure of several tenants. However, there has been strong leasing activity over the past two years and occupancy has increased to 91.7% according to the September 2023 rent roll. Cash flow has increased over 50% since YE2021, primarily due to higher rental rates and improved occupancy. The loan reported an annualized NCF of $21.4 million (reflecting a whole loan DSCR of 3.62x) as of the trailing nine months ended September 30, 2023 up from $19.2 million (whole loan DSCR of 3.25x) as of YE2022 and $13.7 million as of YE2021. While same-store in-line sales have declined slightly year-over-year by approximately 3.4%, they remain strong at $877 psf excluding Apple and $1,041 psf overall.

In the analysis for this review, Morningstar DBRS updated its LTV sizing for both loans. For the Pearlridge Center loan, Morningstar DBRS derived an NCF of $19.3 million, accounting for the loss of Bed Bath & Beyond, and applied a capitalization (cap) rate of 7.25%, resulting in a Morningstar DBRS value of $266.8 million, representing a 37.6% haircut to the issuance value of $427.5 million and a whole loan LTV of 84.3%. Morningstar DBRS maintained a positive qualitative adjustment to the LTV sizing benchmarks totaling 4.0% to reflect the property’s quality and strong market fundamentals, as the property benefits from its location and strong competitive position. For the Scottsdale Quarter loan, Morningstar DBRS considered an upgrade stress given the loan’s significant cash flow growth since 2020. Morningstar DBRS updated its blended cap rate approach, assuming 7.25% for retail space and 10% for office space, resulting in an overall cap rate of 8.25%. Morningstar DBRS’ concluded NCF, based on the annualized Q3 2023 figure, incorporated a 20% haircut stress to account for the recent significant improvement in performance and test the cash flow durability. The resulting Morningstar DBRS value was $207.6 million, representing a 40.9% haircut to the issuance value of $351.0 million and a whole loan LTV of 79.5%. Morningstar DBRS maintained a positive qualitative adjustment to the LTV sizing benchmarks totaling 1.0%, which included a -1.0% adjustment for cash flow volatility given the soft office market and a 2.0% adjustment for above-average property quality.

The loans are not cross-collateralized or cross-defaulted. Of the $165.0 million whole loan secured by Scottsdale Quarter, $95.0 million is senior A note debt, with a total of $13.0 million in subordinate B note debt and $57.0 million in subordinate C note debt. Of the senior A note debt for Scottsdale Quarter, $25.0 million in pari passu proceeds were contributed to this trust, with the remaining A note debt split pari passu across two conduit transactions in JPMBB Commercial Mortgage Securities Trust 2015-C30 and COMM 2015-CCRE25 Mortgage Trust, the latter of which is not rated by Morningstar DBRS. The $25.0 million in pari passu A note debt and the $13.0 million B note back the pooled classes, and the $57.0 million in C note debt backs the rake SQ classes in the subject transaction. Of the senior A note debt for Pearlridge Center, $10.4 million in pari passu proceeds were contributed to this trust, with the remaining A note debt split pari passu across the same two conduit transactions mentioned above. The $10.4 million in pari passu A note debt and the $48.6 million B note back the pooled classes, and the $46.0 million in C note debt backs the rake PR classes in the subject transaction.

The Morningstar DBRS credit ratings assigned to Classes SQ-1, SQ-2, and SQ-3 are lower than the results implied by the LTV sizing benchmarks. These classes are loan-specific certificates that are only entitled to payments of interest and principal from the Scottsdale Quarter loan. The variances are warranted given the property’s significant exposure to the office sector, which continues to face challenges, driven by shifts in workplace dynamics and end-user demand. Also, the loan is scheduled to mature in June 2025, and, given the higher-interest-rate environment, the borrower may face additional challenges securing takeout financing.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023) at https://dbrs.morningstar.com/research/416784.

Class X is an interest-only (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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

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

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

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-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

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

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

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

North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://dbrs.morningstar.com/research/422174).

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261).

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://dbrs.morningstar.com/research/420982).

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592).

Legal Criteria for U.S. Structured Finance (December 7, 2023; https://dbrs.morningstar.com/research/425081).

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.