DBRS Confirms All Classes of Houston Galleria Mall Trust 2015-HGLR

DBRS Limited (DBRS) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-HGLR 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)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The transaction closed in March 2015 and consists of a $1.2 billion whole loan split between the $1.05 billion note securitized in this transaction and a $150 million companion loan securitized in the JPMBB 2015-C28 transaction, which is not rated by DBRS. The loan is secured by the fee interest in an enclosed super-regional mall located in Houston, Texas, occupied by roughly 300 national and regional tenants, anchored by 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 and are subject to ground leases. The mall is the fourth largest in the nation, owned by Simon Property Group (SPG) and Institutional Mall Investors (IMI).

In May 2015, the property was affected by a flood and suffered significant damage with a repair cost of approximately $1.5 million. The parking garage was filled with water up to nine feet, one wall of the garage was displaced as wll as electrical utility rooms and switchgear equipment were submerged. The loan was added to the servicer’s watchlist in September 2015 for monitoring of repairs and was removed in mid-2017 when the site inspection confirmed the flooding damage had been fully addressed. The property was not affected by Hurricane Harvey, which brought widespread flooding and general destruction to the Houston area in August 2017.

The construction of a new space for Saks and the accompanying luxury wing was completed in April 2016 and July 2017, respectively. The Saks store has been re-positioned in a more anchor-like location, replacing some former in-line space and a portion of the old Macy’s space (not included as collateral for the loan). The former Saks store was reconfigured into approximately 110,000 square feet (sf) of space designated for smaller retailers and restaurants. That reconfigured space is part of the collateral for this loan. Although the new wing is complete, most of the new restaurant spaces have yet to open. Notably, Nobu, Fig & Olive and Spice Route should be open sometime 2018. According to the “Houston Business Journal,” Nobu’s build-out cost was $7.0 million (the space will be roughly 10,000 sf), while Fig & Olive’s space will be roughly 7,000 sf (the build-out cost for which was not indicated).

In addition to the capital invested for these projects, SPG also announced plans for a condo/hotel to be built next to the new Saks store. These plans were announced in early 2017, and the project is expected to include 220 hotel rooms and between 75 and 100 luxury condominium units, with the project expected to come online in late 2019 or early 2020.

According to the December 2017 rent roll, the collateral occupancy (including new developed space) was 89.7% occupied, a decrease from the September 2016 occupancy rate of 96.8% and issuance rate of 92.9%. The decline from issuance is primarily due to the final build-outs and impending opening dates for some tenants set to occupy the newly-built space. The three largest collateral tenants, representing 10.8% of the net rentable area (NRA) include Lifetime Fitness (6.6% of the NRA, expiring March 2038), Forever 21 (2.3% of the NRA, expiring January 2023) and H&M (1.9% of the NRA, expiring January 2025). Lifetime Fitness replaced the former Galleria Tennis and Athletic Centre. Rollover is minimal this year as there are just seven tenants totalling 1.7% of the collateral NRA rolling over the remainder of 2018.

Tenant rollover is more significant in 2019 when 38 tenants are scheduled to roll, collectively representing 15.1% of the collateral NRA. According to CoStar Group Inc., retail properties located in the Galleria submarket reported an average vacancy rate of 1.4%. The subject’s average rental rate for in-line tenants (excluding ground rents and storage) was $81.36 per sf (psf), which is well above the market and above the September 2016 average rental rate of $78.84 psf, and the average DBRS Base Rent figure assumed at issuance of $62.04 psf.

According to the tenant sales report for the T-12 ending September 2017, in-line tenants occupying less than 10,000 sf reported YE2016 sales of $826 psf, a slight decrease over the YE2015 sales of $842 psf, but projected sales for 2017 suggest a significant increase to an average of $947 psf. Tenants occupying more than or equal to 10,000 sf reported YE2016 sales of $413 psf and showed projected sales of $400 psf for 2017.

At YE2017, the amortizing debt service coverage ratio (DSCR) was 2.61 times (x), compared with the YE2016 amortizing DSCR of 2.46x and the DBRS Term DSCR derived at issuance of 2.32x. The YE2017 figure is reflective of a 6.3% increase in NCF over the prior year due to a 4.5% increase in effective gross income, which was up by 12.3% over the Issuer’s underwritten figure.

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 reference tranche adjusted upward by one notch if senior in the waterfall.

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

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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 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.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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