Fitch Affirms JPMCC 2015-SGP
The certificates represent the beneficial interest in a trust that holds a four-year, initial-term, floating-rate, interest-only $925 million mortgage loan primarily secured by the fee and leasehold interests in 235 wholly owned retail properties totalling 37.1 million square feet (sf) located in 49 U. S. states and Puerto Rico (the wholly owned properties). The majority of the portfolio is under a master lease to Sears Holdings Corporation LLC (Sears) and Kmart Operations LLC (Kmart), subsidiaries of Sear's Holding Corporation (SHLD). Sears is currently rated 'CC' by Fitch.
KEY RATING DRIVERS
The affirmations reflect the stable performance of the collateral since issuance. As of year-to-date June 2016, the net operating income debt service coverage ratio (DSCR) reported at 3.76x, compared to 4.15x underwritten at issuance. Occupancy has remained flat, reporting at 99% as of July 2016. The portfolio is a mix of free-standing and attached stores, as well as a mix of Sears, Kmart and third-party tenant stores. The SHLD master lease currently covers 221 properties (139 Sears and 82 Kmart's), totalling 33.1 million sf (89.8% of the portfolio net rentable area [NRA]). Third-party tenants account for 2.98 million sf (8.1%) across 76 properties, of which 13 properties are fully leased to third-party tenants. Fifty-eight stores totalling 447,561 sf (1.2%) are under a master lease to Land's End.
At closing, $42.5 million was funded to cover existing and outstanding leasing and redevelopment costs. The reserve balance as of September 2016 was $35.9 million. There is also a future funding commitment of $100 million to be used for strategic re-leasing that is not part of the trust but, if funded, will be pari passu to the mortgage. Fitch has requested an update regarding the future funding component, but has not yet received a response on the 17g-5 providers website. The future funding commitment has been assumed to be funded for purposes of Fitch's analysis.
The sponsor, Seritage Growth Properties (SGP), has begun implementing its business plan of strategic recapture and releasing of Sears/Kmart space. The terms of the master lease allows SGP to reduce the exposure to Sears and Kmart over time by re-tenanting and redeveloping the majority of the portfolio into multi-tenant retail real estate. Current third party leases have an average rent of approximately $11.71 per square foot (psf), compared with approximately $4.00 psf on the master lease terms. To assist in its transitional efforts, the sponsor has entered into a sub-management agreement with Jones Lang Lasalle to provide certain property management, tenant relations, property accounting, and planning services.
Since issuance, three properties have had their Sears/Kmart spaces fully recaptured with releasing and redevelopment in progress: Recaptured Sears space at the Oak Court Mall in Memphis, TN is currently 32% pre-leased, which includes Nordstrom Rack (25% of the NRA) with an expected opening in May 2017. Recaptured Kmart space at a Braintree, MA retail centre has been partially pre-leased to Nordstrom Rack (41% NRA) and Saks Off 5th (37%) with expected openings in October 2016; an Ulta Beauty Salon (12%) was already in place at the centre. In Honolulu, HI a recaptured Kmart space has been fully pre-leased to Ross Dress for Less (43% NRA), Long's/CVS (31%) and Petsmart Inc. (26%) with expected openings between May 2017 and July 2017.
News sources have recently reported that 64 Kmart's are expected to close nationwide, with liquidations beginning in September 2016. Of the stores initially reported, 17 assets in the pool are to be impacted by the closures. Theses closures are in line with the sponsor's business plan, and its impact was captured in Fitch's analysis which is based on a dark value assessment of the pool.
The ratings are considered stable due to sufficient credit enhancement. Fitch's analysis is based on a dark value assessment that assumes Sears and Kmart vacate their respective spaces, day one, across the portfolio, and the space is re-leased to a third-party tenant. Fitch does not foresee negative rating migration unless a material economic or asset level event changes the transaction's portfolio-level metrics. Detailed explanations of additional stresses and rating sensitivities are available in the report 'JPMCC 2015-SGP (US CMBS)' dated Sept. 30, 2015, available at www. fitchratings. com.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has affirmed the following ratings:
--$319,000,000a class A notes at 'AAAsf'; Outlook Stable;
--$125,300,000a class B notes at 'AA-sf'; Outlook Stable.
The following classes are not rated:
--$720,000,000ab class X-CP notes;
--$925,000,000ab class X-EXT notes;
--$116,600,000a class C;
--$121,100,000a class D;
--$88,200,000a class E;
--$154,800,000a class F.
A Privately placed pursuant to Rule 144A.
B Notional amount and interest-only.