DBRS Limited (Morningstar DBRS) confirmed its credit 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)
All trends are Stable with the exception of Classes E-FL, E-7, and E-10, which have credit ratings that do not typically carry trends in Commercial Mortgage Backed Securities (CMBS) credit ratings. The credit ratings confirmation and Stable trends reflect Morningstar DBRS' expectations for the portfolio, which remain in line with the last rating action in February 2023. Since then, the trust has paid down by approximately 16.4% as a result of loan amortization and the release of two properties in the portfolio, increasing the total principal paydown to $166.1 million (reflecting a collateral reduction of 19.6% since issuance). The two released properties, Garden State Plaza and Garden City (freestanding), were released with the September 2023 and December 2023 payments, respectively. These properties were previously occupied by Lord & Taylor and collectively represented 7.4% of the issuance allocated loan amount (ALA), and based on the release provisions, paid a combined release premium of $73.2 million, which was well above each respective property's 2019 go-dark values. Property releases are subject to release premiums of 115.0% of the ALA. Although the principal reduction is noteworthy, Morningstar DBRS remains concerned with the resolution of the vacant stores, which represents more than 70.0% of the ALA.
At issuance, the transaction consisted 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 represented 19 fee-simple ownership interests (64.1% of the pool balance) and 15 leasehold interests (35.9% of the pool balance), totaling 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. The loan is sponsored by a joint venture between Hudson's Bay Company (HBC) and Simon Property Group (SPG). 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. 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 totaling $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. While all 22 unreleased Lord & Taylor properties remain mostly vacant as of January 2024, discussions regarding another release is ongoing on a property that represents about 3.5% of the ALA. Another mitigating factor is the sponsor's commitment to the collateral by keeping current on its debt service payments and abiding by the terms of a loan modification that was 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.
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 on a pro rata basis, effective June 2022. As a result of the monthly paydowns and property releases, loan Component A should have paid off as monthly payments are now paying down loan Component B. However, due to fees associated with the LIBOR conversion that were passed through the trust, an aggregate balance of approximately $3,000 remains outstanding for loan Component A. According to the certificate administrator, revisions are expected to the December 2023 and subsequent remittances once funds are received from the borrower. Morningstar DBRS' expects to discontinue the credit ratings on loan Component A upon the completion of the revisions to the applicable monthly reports. As of January 2024, the loan reported a total of $8.2 million across all reserves. 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.
According to the most recent financials, the portfolio reported an annualized consolidated net cash flow (NCF) of $84.7 million for the trailing three-month (T-3) through March 31, 2023, period, which is inclusive of released properties and reflects a debt service coverage ratio (DSCR) of 2.00 times (x). Although this is below the T-12 January 31, 2022, NCF of $87.8 million (reflecting a DSCR of 2.05x), it is above the Morningstar DBRS NCF of $75.8 million that was derived during the August 2021 review. The decline from the prior year is driven by a dip in base rental revenue.
Given the prolonged vacant status of the properties, as well as dated appraisals obtained by the loan sponsor and finalized in 2019, Morningstar DBRS maintained a stressed scenario in evaluating the support for the current credit ratings given the increased propensity for adverse selection. An updated Morningstar DBRS value was derived to exclude the released properties, and a haircut was applied to the 2019 appraisal values, resulting in a stressed value of $678.4 million, representing a -41.1% variance from the issuance appraised value of $1.2 billion for the remaining collateral.
The credit ratings assigned to Classes B-FL, C-FL, D-FL, B-7, C-7, D-7, B-10, C-10, and D-10 are lower than the results implied by the loan-to-value sizing benchmarks by three or more notches. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more variances from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material variances is uncertain loan-level event risk, primarily tied to the unreleased vacant properties as noted above. In addition, as the pool continues to season and properties continue to be released, there could be risks associated with cash flow volatility and adverse selection.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.
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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.
Notes:
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is North American CMBS Surveillance Methodology, (March 16, 2023), https://dbrs.morningstar.com/research/410912
Other methodologies referenced in this transaction are listed at the end of this press release.
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 info-DBRS@morningstar.com.
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.
Morningstar DBRS 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 credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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.
DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
Rating North American CMBS Interest-Only Certificates (December 13, 2023),
https://dbrs.morningstar.com/research/425261
North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023),
https://dbrs.morningstar.com/research/422174
Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://dbrs.morningstar.com/research/415687
DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
North American Commercial Mortgage Servicer Rankings (August 23, 2023),
https://dbrs.morningstar.com/research/419592
Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://dbrs.morningstar.com/research/425081
A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.
For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
SIMON PROPERTY GROUP, INC. 
