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

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-HGLR (the Certificates) 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-NCP at BB (high) (sf)
-- Class E at BB (sf)

All trends are Stable. The rating confirmations reflect the stable performance of the underlying collateral, as demonstrated by positive cash flow growth over the prior year as of the most recent reporting, as well as strong sales figures and healthy occupancy rates for the collateral mall.

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 sponsors for the loan are Simon Property Group (SPG) and Institutional Mall Investors. SPG, considered the largest real estate investment trust in the United States, is also the loan’s guarantor and an affiliate of SPG manages the collateral property.

The loan is secured by the fee interest in a 1.2 million-square-foot (sf) portion of the Houston Galleria, a 2.1 million-sf enclosed, super-regional mall in Houston, about 10 miles west of the central business district. The mall is the largest shopping center in Texas and the fourth-largest in the nation. Anchors include noncollateral 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 but are subject to ground leases. All anchor spaces at the property are occupied and operating as of July 2023. The overall tenant mix is strong and comprises approximately 400 retailers and restaurants, including many upscale tenants such as Tiffany & Co., Celine, Gucci, Saint Laurent, Balenciaga, and Tesla.

According to the April 2023 rent roll, the mall reported an occupancy rate of 89.8%, relatively unchanged from 89.7% in April 2022. The largest in-line tenants are Life Time Fitness (6.5% of the collateral net rentable area (NRA), lease expires in January 2038), Forever 21 (2.3% of the NRA, lease expires in January 2026), and H&M (1.9% of the NRA, lease expires in January 2025). Upcoming rollover is minimal, with leases representing 8.2% of the NRA scheduled to expire in 2023, and an additional 9.7% in 2024. Given the stable historical occupancy, DBRS Morningstar expects the majority of these leases to be renewed or backfilled.

According to the December 2022 tenant sales report, Saks reported sales of $794 per square foot (psf), in-line tenants occupying less than 10,000 sf (excluding Apple) reported sales of $1,186 psf, and in-line tenants occupying at least 10,000 sf reported sales of $1,028 psf, compared with sales at issuance of $557 psf, $883 psf, and $936 psf, respectively.

The servicer reported a YE2022 net cash flow (NCF) of $118.3 million, compared with the YE2021 NCF of $117.9 million, the YE2020 NCF of $113.2 million, and the YE2019 NCF of $117.3 million. The property experienced a relatively mild disruption during the initial stages of the Coronavirus Disease (COVID-19) pandemic, and the loan continues to report NCF figures above the Issuer’s NCF of $100.1 million at issuance. Given the significant cash flow growth since issuance, DBRS Morningstar updated the loan-to-value (LTV) sizing in the analysis for this review to reflect both the impact of that growth and the ability of the ratings to withstand any fluctuations in property value over the remainder of the term. To that end, DBRS Morningstar concluded a DBRS Morningstar NCF of $116.0 million, based on a 2.0% haircut to the YE2022 NCF figure. In the baseline scenario, DBRS Morningstar applied a capitalization (cap) rate of 6.5%, on the low end of DBRS Morningstar’s cap rate range for this property type, resulting in a DBRS Morningstar baseline value of $1.78 billion. In the stressed scenario, DBRS Morningstar applied a cap rate of 8.0% (in the middle of DBRS Morningstar’s cap rate range), resulting in a stressed DBRS Morningstar value of $1.48 billion. To evaluate the stability of the upgrade pressure the baseline LTV sizing results produced, DBRS Morningstar sized the stressed DBRS Morningstar value in the analysis for this review. DBRS Morningstar maintained positive qualitative adjustments totaling 4.5% to account for property quality, historically strong sales, and the subject’s dominant market positioning.

The ratings on Classes C, D, and E are lower than the results implied by the LTV sizing benchmarks by three or more notches. These variances are warranted because of the transaction’s near-term maturity, with interest rates significantly higher than those in place when the underlying loan was made. Although the strong performance suggests a refinance should be likely, DBRS Morningstar maintained a conservative approach in the analysis for this review given the general disruption to lending in the current environment.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784 (July 4, 2023).

Class X-NCP is an 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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

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

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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