DBRS Confirms Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C23 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-FG at AAA (sf)
-- Class X-H at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PST at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (high) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The collateral consists of 75 loans secured by 151 commercial properties. As of the May 2016 remittance, the pool has experienced collateral reduction of 0.5% as a result of scheduled amortization, with all of the original 75 loans remaining in the pool. There are 68 loans, representing 85.3% of the current pool balance, that are reporting YE2015 financials. These loans report a weighted-average (WA) debt service coverage ratio (DSCR) of 1.62 times (x) and a WA debt yield of 8.9%. At issuance, the pool reported a WA DSCR and debt yield of 1.64x and 8.6%, respectively. DBRS believes reported cash flows are likely artificially depressed for some of the loans showing YE2015 metrics, as first year reporting is often skewed compared with underwritten or historical figures, particularly when it comes to expenses. As such, DBRS expects the WA DSCR for the pool will improve with the 2016 reporting. At issuance, DBRS shadow-rated two loans investment grade, and with this review, DBRS confirms the performance of the loans to be consistent with investment-grade loan characteristics.

At the May 2016 remittance, there were three loans on the servicer’s watchlist, representing 3.5% of the current pool balance. One loan, Snowcreek Crossing (Prospectus ID #26, 1.05% of the pool), was flagged for upcoming tenant rollover, and the remaining two loans were flagged for performance declines. These two loans are detailed below.

The Aviare Place Apartments loan (Prospectus ID#16, 2.0% of the current pool balance) is secured by a 266-unit multifamily property located in Midland, Texas, a city highly dependent on the oil industry. This loan was placed on the watchlist because of the low YE2015 DSCR of 1.09x, a decrease from the DBRS underwritten DSCR of 1.51x. Property cash flows have declined despite a strong YE2015 occupancy rate of 95.1%, which compares well with the in-place occupancy level at issuance of 93.2%. The decline in net cash flow was primarily driven by a 35.4% increase in operating expenses from the DBRS underwritten figure, with increases concentrated in utilities, repairs and maintenance and general and administrative expenses. In addition, effective gross income decreased slightly by 4.6% as a result of a decrease in base rental revenue, driven by lower rents at the property since issuance. According to the December 2015 rent roll, the average rental rate was $915 per unit, a decrease from the in-place average rental rate at issuance of $1,142 per unit, but in line with the Odessa-Midland submarket of $919 per unit for properties of similar vintage. According to Reis, the submarket has experienced declining performance trends since issuance. As of the issuance data, the average rental rate and vacancy rate for properties of similar vintage was $1,089 per unit and 6.8%, respectively, compared with the Q1 2016 figures showing an average rental rate and vacancy rate of $919 per unit and 12.4%, respectively. Although the subject’s average rental rate is in line with the submarket, the subject’s vacancy rate of 4.9% is significantly lower than the submarket. At issuance, the DBRS underwritten net cash flow figure represented a variance of -8.5% from the issuer’s underwritten figure, driven by a higher vacancy rate and operating expenses underwritten by DBRS.

The Country Corners Shopping Center loan (Prospectus ID#52, 0.5% of the current pool balance) is secured by a 70,000-square foot (sf) retail property in Howell, Michigan, which is approximately 30 miles northwest of Ann Arbor. This loan was placed on the watchlist because of a depressed occupancy level, which was 63.1% as of YE2015, down from 84.1% at issuance. The former largest tenant, Total Fitness Now, occupied 18.2% of the net rentable area and vacated the property in December 2015 after renewal discussions for the September 2015 lease expiry fell through. DBRS has requested a leasing update from the servicer and is currently awaiting a response as of the date of this press release; there are no known co-tenancy clauses with the remaining tenants in relation to the loss of Total Fitness Now, which was paying a rental rate of $7.00 psf. At issuance, the loan had an upfront tenant reserve of $150,000 with ongoing collections to a ceiling of $200,000. As of May 2016, the balance of the reserve was $191,500. According to the YE2015 financials, the DSCR was reported at 1.36x; DBRS estimates the DSCR will fall to approximately 1.15x with the loss of Total Fitness Now, and modeled the loan with an increased probability of default given the projected decline in coverage.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.