DBRS Morningstar Confirms All Classes and Changes Trends on Seven Classes of Hudson's Bay Simon JV Trust 2015-HBS

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-HBS issued by Hudson’s Bay Simon JV Trust 2015-HBS as follows:

-- Class A-FL at AA (high) (sf)
-- Class B-FL at A (low) (sf)
-- Class C-FL at BB (sf)
-- Class X-2-FL at B (sf)
-- Class D-FL at B (low) (sf)
-- Class E-FL at CCC (sf)
-- Class X-A-7 at AAA (sf)
-- Class A-7 at AA (high) (sf)
-- Class X-B-7 at A (sf)
-- Class B-7 at A (low) (sf)
-- Class C-7 at BB (sf)
-- Class D-7 at B (low) (sf)
-- Class E-7 at CCC (sf)
-- Class X-A-10 at AAA (sf)
-- Class A-10 at AA (high) (sf)
-- Class X-B-10 at A (sf)
-- Class B-10 at A (low) (sf)
-- Class C-10 at BB (sf)
-- Class D-10 at B (low) (sf)
-- Class E-10 at CCC (sf)

With this review, DBRS Morningstar changed the trends on Classes C-FL, X-2-FL, D-FL, C-7, D-7, C-10, and D-10 to Stable from Negative. All other trends are Stable, with the exceptions of Classes E-FL, E-7, and E-10, which have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings.

DBRS Morningstar previously downgraded 18 classes of this transaction in August 2021, based largely on the dark values for the vacant stores as estimated in appraisals obtained by the loan sponsor and finalized in 2019. In March 2022, DBRS Morningstar had assigned Negative trends to the aforementioned classes given the possibility for further value declines and the continued dark status for a significant portion of the collateral. For additional information on the previous rating actions and the DBRS Morningstar value analysis, please see the press releases dated August 3, 2021, and March 21, 2022, on the DBRS Morningstar website. DBRS Morningstar’s prior and current analysis includes a stressed view of the dark values. While 25 of the 34 collateral properties remain vacant, the sponsor has demonstrated its commitment to the collateral by keeping current on its debt service payments and abiding by the terms of a loan modification executed in October 2021, which resulted in added structural features to mitigate ongoing default risk, the loan’s return to the master servicer in January 2022, and the resolution of previous ongoing litigation with the borrower and the lender. DBRS Morningstar, which has already baked its value expectations into the rating analysis, views these mitigating factors as support for the trend changes to Stable from Negative.

As part of the loan modification, the borrower repaid all accrued and unpaid debt service from the date of default through September 30, 2021. Various reserves have been funded in order to help reposition the dark collateral properties, with excess cash flow to be applied to the principal balance of the loan. According to the trailing nine months financials ended October 31, 2022, the loan reported an annualized net cash flow of $85.1 million, representing a debt service coverage ratio of approximately 1.94 times. As of February 2023, the loan reports a total of $13.3 million across all reserves and, as of June 2022, loan Component A has begun to pay down on a pro rata basis. Through the February 2023 remittance, over $33.0 million of principal paydown has been applied to loan Component A, representing a 22.1% paydown to loan Component A and a 3.9% paydown to the whole loan. Terms of the modification also included an extension of the maturity dates for loan Components A and B to August 2024, with a 12-month extension option to bring the fully extended maturity dates co-terminous with Component C in August 2025.

The transaction consists of an $846.2 million first-mortgage loan secured by 34 cross-collateralized properties previously leased to 24 Lord & Taylor stores and 10 Saks Fifth Avenue stores in 15 states. The collateral properties represent 19 fee-simple ownership interests (64.1% of the pool balance) and 15 leasehold interests (35.9% of the pool balance), totalling 4.5 million square feet. Individual tenant storefronts are located in various malls and freestanding locations with a concentration in New Jersey and New York, totalling 15 stores across the two states. The loan includes a $149.9 million floating-rate Component A, a $371.2 million fixed-rate Component B, and a $324.9 million fixed-rate Component C.

The loan is sponsored by a joint venture between Hudson’s Bay Company (HBC) and Simon Property Group (SPG). Whole loan proceeds of $846.2 million, SPG equity of $63.0 million, and implied equity of $609.5 million from the contribution of HBC’s then-owned properties financed the acquisition of the properties for $1.4 billion and funded tenant improvements totalling $63.0 million. The portfolio was formerly 100% leased to Lord & Taylor and Saks Fifth Avenue on two master leases with 20-year initial terms and six five-year extension options for each store. The operating leases are fully guaranteed by HBC. Following Lord & Taylor’s bankruptcy filing in 2020, all Lord & Taylor stores were closed, resulting in 24 of the 34 collateral properties becoming fully vacant. Based on recent correspondence with the master servicer, all 24 former Lord & Taylor stores remain vacant as of January 2023; however, the sponsor remains active in its leasing efforts to backfill these spaces, with significant interest being generated from office and healthcare users.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Classes X-2-FL, X-A-7, X-B-7, X-A-10, and X-B-10 are interest-only (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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577