DBRS Confirms Ratings on Houston Galleria Mall Trust 2015-HGLR

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-HGLR issued by Houston Galleria Mall Trust 2015-HGLR 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 E at BB (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since closing, which is in line with the DBRS expectations at issuance. The transaction closed in March 2015 and consists of a $1.05 billion loan secured by the fee interest in an enclosed super-regional mall located in Houston, Texas. The fee interest consists of a 1.2 million square feet (sf) portion of the 2.1 million sf mall, currently occupied by roughly 300 national and regional tenants. The collateral is anchored by Macy’s, Nordstrom, Neiman Marcus and Saks Fifth Avenue (Saks). Macy’s and Nordstrom own their own sites and spaces, while Neiman Marcus and Saks own their respective improvements and are subject to ground leases. The property is owned by Simon Property Group (SPG) and Institutional Mall Investors (IMI). The property is well located as the 2015 population within a five-mile radius from the property was 484,631 and the average household income was $103,055.

This loan was placed on the servicer’s watchlist because of a flood that occurred in May 2015, which resulted in major damage to the property. The parking garage was filled with water up to nine feet high with one wall of the garage displaced. Electrical rooms and equipment were also damaged from being submerged. The servicer advised that the estimated cost to repair was $1.5 million and the borrower has to date received a $350,000 advance from the insurance company. The borrower is currently covering all expenses out of pocket until additional proceeds from the insurance company are received. All deferred maintenance items associated with the flood were expected to be completed by the end of 2015; however, there is one item outstanding and DBRS has requested an update and time of completion regarding that item. The costs associated with repairs to date were approximately $784,000.

The mall has performed well historically, with occupancy, including temporary tenants, averaging 95.5% since 2005. As of the October 2015 rent roll, collateral occupancy was 94.1%. The subject reported an average rental rate of $55 per square foot (psf), which is well above the Galleria/Uptown submarket average triple net rent of $28 psf, as reported by CoStar. At issuance, it was known that Saks will move to the western portion of the site in an anchor-like location, replacing some former in-line space and a portion of the old Macy’s space, all of which will not be included as collateral for the loan. The new store is set to open in April 2016 while the old Saks store will be reconfigured to accommodate smaller retailers and restaurants by 2017. This space will serve as collateral for the loan. According to the borrower, 50% of the space has been committed by or leased to tenants. In addition, other renovation projects to the luxury corridor in Galleria I and a portion of Galleria II as well as the construction of an outparcel for the Jewelry Box store is ongoing at the property. DBRS has requested an update from the servicer regarding all renovation work and the anticipated completion date. The aggregate cost of all these developments and renovations is expected to total approximately $250 million, according to the borrower. Also, the February 2016 servicer site inspection noted that Neiman Marcus’ space will be renovated as well at the cost of the tenant.

The YE2015 tenant sales report showed a slight decline in overall in-line sales performance for the property compared with the YE2014 figures, which may be attributed to the damage from the parking garage that disrupted traffic to the property as well as potential decreases in consumer confidence given Houston’s reliance on the energy market and its relative weakness recently. Tenants occupying less than 10,000 sf reported YE2015 sales of $842 psf, a 5.9% decrease from the YE2014 sales of $895 psf, and tenants occupying more than 10,000 sf reported YE2015 sales of $955 psf, a 1.0% decrease from the YE2014 sales figures. Saks reported a YE2015 sales figure of $517 psf, which is a 5.5% decrease from YE2014 of $545 psf. Despite the decline in sales, the property continues to exhibit strong performance with an annualized Q3 2015 net cash flow increase of 3.5% over the DBRS underwritten level. The Q3 2015 amortizing debt service coverage ratio (DSCR) was 2.40 times (x), which is above the DBRS underwritten DSCR of 2.32x.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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