DBRS Morningstar Maintains Under Review with Negative Implications Status on Five Classes of WP Glimcher Mall Trust 2015-WPG, Confirms Remaining Classes

DBRS Limited (DBRS Morningstar) maintained the Under Review with Negative Implications status on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2015-WPG issued by WP Glimcher Mall Trust 2015-WPG:

-- Class PR-1 at BBB (low) (sf), Under Review with Negative Implications
-- Class SQ-1 at BBB (low) (sf), Under Review with Negative Implications
-- Class PR-2 at BB (sf), Under Review with Negative Implications
-- Class SQ-2 at BB (low) (sf), Under Review with Negative Implications
-- Class SQ-3 at B (low) (sf), Under Review with Negative Implications

These classes are collateralized by subordinate debt on the two retail assets in this transaction, Scottsdale Quarter and Pearlridge Center. As these classes are Under Review with Negative Implications, they do not carry trends.

In addition, DBRS Morningstar confirmed the ratings on the following pooled classes:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X at A (sf)
-- Class C at A (low) (sf)

DBRS Morningstar also changed the trend on Class A to Stable from Negative. The trends on Classes, B, X, and C remain Negative; these classes maintain Negative trends because of the performance challenges for the underlying collateral associated with the challenges for retail that have been exacerbated by the Coronavirus Disease (COVID-19) pandemic. Although these challenges are likely to continue to result in lower foot traffic and spending at the collateral properties and others across the country, putting pressure on the sponsor’s ability to backfill existing and future vacancies, DBRS Morningstar notes that the servicer reported better-than-expected cash flow figures for both collateral assets in 2020, supporting the Stable trend on Class A.

The Negative trends and Under Review with Negative Implications statuses are reflective of DBRS Morningstar’s concerns not only with the challenges facing regional malls and other retail property types, but also with one of the underlying loans’ sponsors, Washington Prime Group (WPG), which has been reporting revenue declines for several years and owns a portfolio of retail properties primarily located in secondary markets. On June 13, 2021, WPG announced its Chapter 11 bankruptcy filing and cited challenges faced during the coronavirus pandemic as contributing to the filing. In addition, WPG secured $100 million in debtor-in-possession financing from Consenting Creditors to support daily operations during the bankruptcy proceedings. The filing was expected, as WPG missed an interest payment on its corporate debt in February 2021 and was widely reported to be in discussion with creditors regarding a potential bankruptcy filing over the months since the payment was missed. The bankruptcy filings do not include the subject loans’ sponsor entities and as such, DBRS Morningstar does not expect the property-level debt to be directly affected by this latest development for WPG.

This transaction is backed by portions of the senior debt and all of the subordinate debt secured by the fee-simple interest in Scottsdale Quarter, a 541,386-square-foot (sf) mixed-use retail centre in Scottsdale, Arizona, and a $105.0 million loan on a portion of the fee and leasehold interest in Pearlridge Center, a 1.14 million-sf super-regional mall in Aiea, Hawaii, the state’s largest enclosed shopping centre. The sponsor for both loans is WPG, which is the successor sponsor to Glimcher Realty Trust and O’Connor Capital Partners. Both properties are managed by WPG.

The individual whole loans on each asset are not cross-collateralized or cross-defaulted. Of the $165.0 million whole loan secured by Scottsdale Quarter, $95.0 million is senior A note debt, with a total of $13.0 million in subordinate B note debt and $57.0 million in subordinate C note debt. Of the senior A note debt for Scottsdale Quarter, $25.0 million in pari passu proceeds were contributed to this trust, with the remaining A note debt split pari passu across two conduit transactions in JPMBB Commercial Mortgage Securities Trust 2015-C30 and COMM 2015-CCRE25 Mortgage Trust, the latter of which is not rated by DBRS Morningstar. The $25.0 million in pari passu A note debt and the $13.0 million B note back the pooled classes, and the $57.0 million in C note debt backs the rake SQ classes in the subject transaction. Of the senior A note debt for Pearlridge Center, $10.4 million in pari passu proceeds were contributed to this trust, with the remaining A note debt split pari passu across the same two conduit transactions mentioned above. The $10.4 million in pari passu A note debt and the $48.6 million B note back the pooled classes, and the $46.0 million in C note debt backs the rake PR classes in the subject transaction.

The Pearlridge Center loan served to refinance existing debt, return $47.0 million of equity to the sponsor, and create a new joint venture, with Glimcher Realty Trust (now WPG) having a 51% share and O’Connor Capital Partners acquiring a 49% share. The subject is on the island of Oahu, approximately nine miles northwest of Honolulu. The December 2020 rent roll showed that the collateral was 91.5% occupied. The property is anchored by Macy’s (18.4% of net rentable area (NRA); lease expiration of February 2027) and a former Sears, which closed its doors in April 2021. Other large tenants include Bed Bath & Beyond (7.3% of NRA; lease expiration of January 2021, which appears to have renewed) and Pearlridge Mall Theatres (4.5% of NRA; lease expiration of December 2022), which reopened in August 2020 after being forced to close amid the pandemic. The property benefits from its customer base, comprising mainly the local populace rather than tourists that drive traffic for other malls in Hawaii. The property has maintained stable performance to date; as of the most recent financial reporting, the loan reported a YE2020 whole-loan debt service coverage ratio (DSCR) of 2.44 times (x), down slightly from YE2019 and YE2018 whole-loan DSCRs of 2.82x and 2.72x, respectively. The loan was previously monitored on the servicer’s watchlist in May 2020 after the borrower requested coronavirus-related relief but was quickly removed after the special servicer denied the request based on the property's strong cash position for the past several years.

In March 2021, DBRS Morningstar received notice from the servicer regarding the Pearlridge Center borrower’s request for a temporary waiver of any and all bankruptcy events of default and any penalties and costs as a result of such action. The servicer agreed to forbear all defaults triggered by any filing through July 1, 2021, for a period of 270 days after. In addition, the borrower will be required to establish cash management through the entire forbearance period and, assuming the filing is cured during the 270-day period and no other defaults exist, the retained funds will be released back to the borrower. Lastly, the borrower will fund a $50,000 legal retainer for counsel and pay all fees and costs associated during the aforementioned forbearance.

The Scottsdale Quarter loan served to refinance existing debt and recapitalized a joint venture with WP Glimcher and O’Connor Capital Partners. Additionally, the sponsor invested $16.6 million of cash equity with the recapitalization. The property is a Class A, mixed-use, open-air lifestyle centre with office space, 17 miles northeast of Phoenix in the affluent Kierland neighbourhood of north Scottsdale. The subject is in a secondary market but has a lifestyle centre format and a better mix of retailers compared with others in WPG’s portfolio. The loan transferred to special servicing in May 2021 for imminent nonmonetary default, likely in relation to the recent WPG Chapter 11 bankruptcy filing. The largest tenants at the property include Restoration Hardware, Pottery Barn, West Elm, Forever 21, and Apple. The collateral portion of the property comprises approximately 67.5% retail space and 32.5% office space. The largest tenant within the office portion of the property is Starwood Hotels and Resorts, which represents 12.5% of the NRA and is on a lease through 2027. Based on the September 2020 rent roll provided, the subject reported an average rental rate of $35.44 per sf (psf), while the retail and office portion reported average rental rates of $37.49 psf and $30.40 psf, respectively.

In addition to sponsorship concerns, occupancy has been trending downward since issuance and showed its largest decline between 2019 and 2020 when IPIC Theaters (8.2% of NRA) and Nike (3.4% of NRA) vacated, causing occupancy to decrease to 70.8% as of Q3 2020 from 83.3% as of YE2019. Although occupancy improved to 78.7% at YE2020, a known exit since that time in H&M (4.4% of NRA) at lease expiry in January 2021 suggests that the occupancy rate has since fallen to 74.2%. The occupancy decline may be temporary, however, as several news articles have reported new tenants that have opened or will be opening at the subject this year, including an 8,000-sf restaurant tenant. According to the YE2020 financials, the loan reported a DSCR of 3.55x based on the senior debt portion of the loan (2.04x on the whole loan), compared with the YE2019 DSCR of 4.58x (2.64x), YE2018 DSCR of 4.63x (2.67x), and DBRS Morningstar DSCR at issuance of 3.26x (2.13x).

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X is an interest-only (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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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 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 [email protected].

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.

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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

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