DBRS Morningstar Confirms Ratings on Houston Galleria Mall Trust 2015-HGLR, Removes Ratings from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2015-HGLR (the Certificates) 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 Negative. DBRS Morningstar also removed the ratings from Under Review with Negative Implications, where they were placed on April 24, 2020.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com.

During its review of the ratings for this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
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 2015-C28 transaction, which is also rated by DBRS Morningstar. The financing enabled the repayment of $821.0 million of existing debt and an equity cash-out of $374.0 million to the sponsors with $161.7 million dedicated to the then-ongoing redevelopment of the Saks Fifth Avenue (Saks) building and space.

The loan is secured by the fee interest in a 1.2 million-sf portion of a 2.1 million-sf enclosed, super-regional mall in Houston, about 10 miles west of downtown. The tenant roster includes approximately 400 retailers and restaurants, along with noncollateral tenants, including: Macy’s, Nordstrom, Neiman Marcus (Neiman), and Saks. Macy’s and Nordstrom own their sites and spaces, while Neiman and Saks own their respective improvements and are subject to ground leases. All anchor boxes at the property are occupied and operating. There is also an attached 469-key Westin Galleria Houston hotel that is not part of the collateral, but completed a $30.0 million renovation in Q4 2018. The subject is the largest shopping center in Texas and the fourth-largest mall in the United States. The mall reported total gross sales of over $1.3 billion in 2013, making it one of the most profitable malls in the United States at the time of issuance. The subject is the dominant mall in the Houston market and caters to a wide range of clientele from midscale to the upper-middle-class and wealthy shoppers in the surrounding affluent communities. The enclosed mall benefits from seven parking garages and surface lots with 13,000 parking spaces. The Galleria Tower I and two other office towers are adjacent to the mall and parking garages.

As of March 2020, the mall reported stable performance with an occupancy rate of 86.6%, which is up from an occupancy of 83.6% at issuance but slightly down from an occupancy of 93.0% at December 2018. The sponsor completed a 110,000-sf expansion in 2017, which created a new luxury retail wing and relocated Saks to an endcap box. The subject reported a strong debt service coverage ratio (DSCR) of 2.58 times (x) per the trailing three-month period ended March 31, 2020, and a DSCR of 2.72x for YE2019, both of which are up from the DSCR of 2.34x at issuance. Prior to the coronavirus pandemic, sales at the property were strong with $1,018 psf of sales reported for in-line tenants occupying less than 10,000 sf in YE2019, which is up from $973 psf of sales at issuance.

On March 19, 2020, the mall shut down because of the coronavirus, reopened at 25% capacity on May 15, 2020, and has since reopened at full capacity.

The sponsor is Simon Property Group, Inc. (Simon) and Institutional Mall Investors LLC, a co-investment venture owned by the California Public Employees' Retirement System and an affiliate of Miller Capital Advisory, Inc. The guarantor is Simon, the largest real estate investment trust in the United States; however, the guarantor’s nonrecourse carveout liability in the transaction is limited to $240.0 million. Simon Management Associates, LLC, a sponsor-affiliate, manages the mall.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure was $115.0 million and DBRS Morningstar applied a cap rate of 6.5%, which resulted in a pre-coronavirus DBRS Morningstar Value of $1.8 billion, a variance of -29.7% from the appraised value of $2.5 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 67.8% compared with the LTV of 47.7% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for regional mall properties, reflecting the property’s above-average quality and dominance in the Houston area.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 4.50% to account for property quality and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 10% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value for this review.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-CP and X-NCP are IO certificates that reference 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

DBRS Morningstar notes that this press release was amended on November 18, 2020, to correct that the JPMBB 2015-C28 transaction is rated by DBRS Morningstar. The amendment was minor and would not impact the understanding of the reader.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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