DBRS, Inc. (DBRS Morningstar) assigned ratings to 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 AAA (sf)
— Class B-FL at AA (low) (sf)
— Class C-FL at BBB (sf)
— Class D-FL at BB (low) (sf)
— Class E-FL at B (low) (sf)
— Class X-2-FL at BB (sf)
— Class A-7 at AAA (sf)
— Class B-7 at AA (low) (sf)
— Class C-7 at BBB (sf)
— Class D-7 at BB (low) (sf)
— Class E-7 at B (low) (sf)
— Class X-A-7 at AAA (sf)
— Class X-B-7 at AA (sf)
— Class A-10 at AAA (sf)
— Class B-10 at AA (low) (sf)
— Class C-10 at BBB (sf)
— Class D-10 at BB (low) (sf)
— Class E-10 at B (low) (sf)
— Class X-A-10 at AAA (sf)
— Class X-B-10 at AA (sf)
DBRS Morningstar did not assign a rating to Class X-1-FL as the class reached its stated and legal maturity in August 2016 and is no longer receiving interest payments.
DBRS Morningstar has placed all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral. Additionally, the loan is currently in special servicing as the servicer is pursuing litigation against the Borrower. The current ratings assigned by DBRS Morningstar do not carry trends.
These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 13, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.
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 while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative 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 and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.
To assign ratings to 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 will be the most affected.
LOAN/PROPERTY OVERVIEW
The transaction consists of an $846.2 million first-mortgage loan secured by 34 cross-collateralized properties leased to 24 Lord & Taylor stores and 10 Saks Fifth Avenue stores located across 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), totaling 4.5 million square feet (sf). Individual tenant storefronts are located in various malls and freestanding locations with a concentration in New Jersey and New York, totaling 15 stores across the two states. The loan includes a $149.9 million floating-rate Component A that had a two-year initial term and three one-year extension options and has now passed its final maturity; a $371.2 million fixed-rate Component B with a seven-year term; and a $324.9 million fixed-rate Component C with a 10-year term.
The loan is sponsored by a joint venture between Hudson 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 totaling $63.0 million. The portfolio is 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.
In 2019, HBC sold the Lord & Taylor brand to Le Tote, a subscription-based online women’s clothing rental business and sold the flagship Lord & Taylor store on Fifth Avenue to WeWork for $850 million. In connection with the sale of the brand, HBC retained ownership of the real estate and reportedly agreed to pay the Lord & Taylor rent for three years; however, the collateral lease obligations are fully guaranteed by the firm. In January 2020, HBC ownership went private with the acquisition of minority shareholders’ interests.
In April 2020 the loan transferred to special servicing and SitusAMC (Situs), the special servicer, discovered that the loan’s Operating Lease Guarantor was subject to a post-privatization corporate restructuring that appears to have taken place in March 2020 without lender consent. In May 2020, the lender filed litigation against the Borrower in federal court in an effort to obtain documentation and knowledge regarding the activities affecting the Operating Lease Guarantor. The lender has not been able to obtain sufficient documentation and transparency to accurately assess the Operating Lease Guarantor’s current creditworthiness. Situs alleges that HBC violated loan covenants and related guarantees and that the entity that guaranteed the rental payments no longer exists. Additionally, Situs asserts that the financial strength of the Operating Lease Guarantor was a key consideration in the funding and structure of the loan and that the corporate restructuring has likely materially reduced the financial strength and capabilities of the Operating Lease Guarantor.
The loan remains outstanding for the April 2020 and all subsequent debt service payments and as of July 2020, Component A reached its final maturity date after the third and final one-year extension option matured. According to the servicer, HBC stated that it intends to secure refinance capital to pay the loan in full; however, Situs has also accelerated the loan and is prepared to initiate foreclosure proceedings, if necessary. The current financial condition of HBC is unknown, but the retailer is facing the same pressures currently experienced by all department store chains including a changing retail landscape, which has been exacerbated by the current coronavirus pandemic. In August 2020, the firm withdrew a potential $900 million bond offering to raise capital after investors reportedly required a higher interest rate than the firm was willing to pay.
At issuance the portfolio was valued at $1.4 billion; however, updated appraisals commissioned by HBC in connection with privatization plan produced an aggregate portfolio value of $1.235 billion, representing a decline of -11.8%. Furthermore, the aggregate dark value for the portfolio was determined to be $723.4 million; although, the special servicer disputed these valuations when they were disclosed in December 2019. As Lord & Taylor filed for bankruptcy in August 2020 and all stores will be liquidated, DBRS Morningstar analyzed the individual November 2019 appraisals, calculating an aggregate go-dark value of $298.7 million for the Lord & Taylor stores. Combined with the aggregate as is value of the Saks Fifth Avenue stores of $540.3 million, the total portfolio value totals $839.0 million (LTV of 100.9%); however, DBRS Morningstar opines that the true value of the collateral is likely lower today.
DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering the unknown financial condition of the Sponsor and Operating Lease Guarantor in addition to the current retail landscape. The resulting NCF figure was $101.1 million and DBRS Morningstar applied a cap rate of 9.5%, which resulted in a pre-coronavirus DBRS Morningstar Value of $1.06 billion, a variance of -24.1% from the appraised value of $1.4 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 79.6% compared with the LTV of 60.4% on the appraised value at issuance.
The cap rate DBRS Morningstar applied is at the higher end of the range of DBRS Morningstar Cap Rate Ranges for anchored retail properties, reflecting the current unknown financial condition of the Sponsor and Operating Lease Guarantor in addition to the uncertain strategy to backfill the 24 Lord & Taylor stores securing the loan.
DBRS Morningstar made no qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis.
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 Operating Lease Guarantor concerns, bankrupt retailers, and increased vacancy expected across the portfolio to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 25% 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 when assigning ratings.
Under the moderate scenario, the cumulative rated debt was insulated from loss.
