DBRS Morningstar Confirms All Classes of Hudson's Bay Simon JV Trust 2015-HBS, Removes All Classes from Under Review with Negative Implications

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 removed all classes from Under Review with Negative Implications, where they were originally placed on September 29, 2020. The trends on classes A-FL, B-FL, X-A-7, A-7, X-B-7, B-7, X-A-10, A-10, X-B-10, and B-10 are Stable. The remaining trends are Negative, which reflects DBRS Morningstar’s view that the values for the underlying collateral are at risk of further decline given the continued dark status for a significant portion of the collateral and uncertainty surrounding the ability to lease or sell those spaces, given the headwinds for regional malls over the last several years that have been heightened amid the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar 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. For additional information on these rating actions, please see the press release dated August 3, 2021, on the DBRS Morningstar website. The rating confirmations and Stable trends with this review reflect the resolution of the previous litigation against the borrower following the execution of a loan modification in October 2021.

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 will be funded in order to help reposition the dark collateral properties and, following the funding of these reserves, excess cash flow will be applied to the principal balance of the loan. Among other items, the maturity dates for loan Components A and B were both extended to August 2024, with a 12-month extension option to bring the fully extended maturity dates co-terminous with Component C in August 2025. With the borrower in compliance with all loan modification terms thus far, the loan was returned to the master servicer in January 2022. Given these developments, the sponsors appear committed to the loan and collateral but there remains uncertainty regarding the value of the underlying collateral, supporting the Negative trends as outlined above.

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. Following the recently executed loan modification, all three Components are scheduled to mature in August 2025.

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.

In April 2020, the loan transferred to special servicing and SitusAMC (Situs), the special servicer at the time, discovered that the loan’s Operating Lease Guarantor was subject to a post-privatization corporate restructuring that appeared 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 had not been able to obtain sufficient documentation and transparency to accurately assess the Operating Lease Guarantor’s current creditworthiness. Situs alleged that HBC violated loan covenants and related guarantees and that the entity that guaranteed the rental payments no longer exists. Additionally, Situs asserted 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. As part of the loan modification, the guaranty litigation was dismissed as both the loan guarantor and Operating Lease Guarantor have provided updated financials and reaffirmed their guarantees, which were considered satisfactory to the special servicer.

At issuance, the portfolio was valued at $1.4 billion; however, updated appraisals commissioned by HBC in connection with a privatization plan produced an aggregate portfolio value of $1.235 billion, representing a decline of -11.8% since issuance. Furthermore, the aggregate dark value for the portfolio was determined to be $723.4 million (it is worth noting that the special servicer disputed these valuations when they were disclosed in December 2019). DBRS Morningstar analyzed the individual November 2019 appraisals, calculating an aggregate go-dark value of $336.3 million for the Lord & Taylor stores. Combined with the aggregate as-is value of the Saks Fifth Avenue stores of $503.6 million, the total implied portfolio value totalled $839.9 million (loan-to-value of 100.9%); however, DBRS Morningstar opines that the true value of the collateral is likely lower today, and DBRS Morningstar assumed a stressed value based on the 2019 figures as part of the downgrades in 2021 and for the subject review.

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.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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 4, 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 info@dbrsmorningstar.com.

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 resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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