Morningstar DBRS Confirms Credit Ratings on All Classes of Houston Galleria Mall Trust 2015-HGLR

DBRS Limited (DBRS Morningstar) confirmed its credit 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-NCP at BB (high) (sf)
-- Class E at BB (sf)

All trends are Stable. The credit rating confirmations reflect the stable performance of the underlying collateral, as demonstrated by positive cash flow growth as of the most recent reporting over the prior year, as well as historically strong sales figures and generally healthy occupancy rates for the collateral mall.

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 Commercial Mortgage Securities Trust 2015-C28 transaction, which is also rated by Morningstar DBRS. The sponsors for the loan are Simon Property Group (SPG) and Institutional Mall Investors. SPG, considered the largest real estate investment trust in the United States, is also the loan's guarantor and an affiliate of SPG manages the collateral property. The loan is scheduled to mature in March 2025 and, considering the strong performance of the collateral, the loan is well positioned to repay.

The loan is secured by the fee interest in a 1.2 million-square-foot (sf) portion of the Houston Galleria, a 2.1 million-sf enclosed, super-regional mall in Houston, about 10 miles west of the central business district. The mall is the largest shopping center in Texas and one of the largest in the country. Anchors include the non-collateral tenants 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 but are subject to ground leases. The overall tenant mix is strong and comprises approximately 400 retailers and restaurants, including many upscale tenants such as Tiffany & Co., Celine, Gucci, Saint Laurent, Balenciaga, and Tesla.

The collateral was 84.4% occupied as of March 2024 compared with 89.8% per the April 2023 rent roll. The largest in-line tenants are Life Time Fitness (6.5% of the collateral net rentable area (NRA), lease expires in January 2038), Forever 21 (2.3% of the NRA, lease expires in January 2026), and H&M (1.9% of the NRA, lease expires in January 2025). There is tenant rollover risk in the next 12 months as tenants accounting for nearly 20.0% of the NRA have leases that are expired or will expire; however, this risk is mitigated by the granularity of the tenant roster, strong tenant sales, and the property's historically stable occupancy rate despite the slight dip seen in the most recent rent roll.

The most recent tenant sales report provided was from December 2022, when Saks reported sales of $794 per square foot (psf), in-line tenants occupying less than 10,000 sf (excluding Apple) reported sales of $1,186 psf, and in-line tenants occupying at least 10,000 sf reported sales of $936 psf compared with reported sales at issuance of $557 psf, $883 psf, and $936 psf, respectively. An updated tenant sales report was requested from the servicer. Despite the slight dip in occupancy and the dated tenant sales report, the sponsor remains committed to the property as a multimillion upgrade was recently announced. According to recent news articles, the renovation will entail enhancements to valet entrances, fixtures, and approximately 155,000 sf of flooring with the work expected to be completed by early 2025.

The collateral net cash flow (NCF) has been increasing year over year, with YE2023 NCF of $124.0 million compared with YE2022 NCF of $118.3 million and YE2021 NCF of $117.9 million. The property experienced a relatively mild disruption during the initial stages of the coronavirus pandemic; however, performance has since rebounded with NCF exceeding the Morningstar DBRS NCF of $115.0 million derived in 2020.

Given the NCF growth, Morningstar DBRS updated the loan-to-value (LTV) Sizing Benchmark in the analysis based on 2% haircut to the YE2023 NCF. A stressed capitalization rate of 8.0% was maintained from the prior review to evaluate the stability of the credit ratings, considering the loan's near-term maturity at a time when interest rates have increased. This resulted in a Morningstar DBRS value of $1.5 billion, representing an implied LTV of 79.0% on the whole loan. Positive qualitative adjustments totaling 4.5% were maintained to reflect the good property quality, historically strong sales, and the subject's dominant market positioning.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

Class X-NCP 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 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 the North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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
DBRS Tower, 181 University Avenue, Suite 700
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 (July 11, 2024), https://dbrs.morningstar.com/research/436004

Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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

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 (July 17, 2023).

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