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

DBRS, Inc. (DBRS) confirmed the ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2015-HGLR issued by Houston Galleria Mall Trust 2015-HGLR:

-- 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 stable performance of the transaction since issuance, which is secured by the fee interest in a 1.2 million square foot (sf) portion of the 2.1 million sf super-regional Houston Galleria Mall (the Galleria) in Houston, Texas. The property is encumbered by 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 has a ten-year term and is interest only throughout. The mall is located approximately eight miles west of downtown Houston, northwest of the intersection of I-610 and I-69. The tenant roster includes approximately 400 retailers and restaurants, along with non-collateral tenants: Macy’s, Nordstrom, Neiman Marcus (Neiman) and Saks Fifth Avenue (Saks). Macy’s and Nordstrom own their sites and spaces, while Neiman and Saks own their respective improvements and are subject to ground leases. There is also an attached 469-key Westin hotel, which recently completed a $30.0 million renovation in Q4 2018. The Galleria is the largest shopping center in Texas and is the fourth largest in the nation. It is owned by Simon Property Group and Institutional Mall Investors.

According to the December 2018 rent roll, the collateral portion of the mall was 92.0% occupied at an average base rental rate of $82.52. The occupancy rate increased from the December 2017 rate of 89.7% but remains below the September 2016 rate of 96.8%. The vacancy rate increased in 2017 at the completion of the 110,000 sf expansion, which created a new luxury retail wing and relocated Saks to an end-cap box. The renovation cost $250.0 million, and the additional square footage is collateral for the subject loan.

According to the rent roll, Neiman renewed its lease for an additional 25 years to January 2044, with its annual ground lease payments increasing to $8.13 per square foot (psf) from $7.93 psf. The three largest collateral tenants, representing 10.8% of the net rentable area (NRA), are Lifetime Fitness (6.6% of the NRA, expiring in March 2022), Forever 21 (2.3% of the NRA, expiring in January 2023) and H&M (1.9% of the NRA, expiring in January 2025). Tenant rollover throughout 2019 includes 29 tenants, collectively occupying 9.5% of the collateral NRA. The largest tenant is Gap (1.5% of the NRA), which had a scheduled lease expiration in January 2019. The tenant appears to have signed a lease extension as it remains on the mall’s online tenant directory. In March 2019, Gap announced it would close 230 underperforming stores over the next two years; however, no official closure list has been provided at this time with the first round of closures expected to occur in Q4 2019. The subject location is quite large at 17,000 sf and has reported flat annual sales of $300 psf over the past two years, equal to an elevated occupancy cost of 33.0%. While the tenant would likely continue to operate at the mall given the mall’s status as a premier retail destination, it is possible that the tenant would reduce its footprint given the high-operating costs relative to its recent sales volume.

According to the YE2018 tenant sales report, overall mall sales performance remains strong. Saks reported sales of $591 psf; in-line tenants occupying less than 10,000 sf (excluding Apple) reported sales of $783 psf; and in-line tenants occupying more than 10,000 sf reported sales of $795 psf. Individual tenant year-over-year (YOY) sales trends are generally positive; however, select large in-line retailers showed YOY sales psf declines, including H&M (-16.7% to $355 psf), TopShop (-0.6% to $295 psf) and Express Women (-2.5% to $356 psf), which may indicate that these tenants occupy retail suites too large for current operations as the YE2018 individual occupancy cost figures were 30.5%, 35.1% and 43.0%, respectively. In comparison, Forever 21 reported YE2018 sales of $296 psf (+8.3% YOY), which equated to an occupancy cost of 20.4%.

At YE2018, the debt service coverage ratio was 2.43 times (x), compared with the YE2017 figure of 2.47x and the YE2016 figure of 2.32x. Continued YOY performance has been stable as effective gross income grew by 2.7%, driven by a 5.2% increase in base rental revenue and a 35.7% increase in percentage rent. Expenses have remained stable; however, the servicer-provided OSAR reported a $4.1 million increase in debt service, netting out the revenue gains.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

DBRS provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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

The principal methodology is North American CMBS Surveillance Methodology (September 2018), which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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