DBRS Morningstar Downgrades Two Classes of COMM 2014-UBS2 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2014-UBS2 issued by COMM 2014-UBS2 Mortgage Trust as follows:

-- Class E to B (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed the remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class X-B at BBB (sf)
-- Class D at BBB (low) (sf)

All trends are Stable with the exception of Classes D, E, and X-B, which have Negative trends. In addition, Class F has a rating that does not carry a trend.

With this review, DBRS Morningstar removed Classes D, E, F, and X-B from Under Review with Negative Implications where they were placed on August 6, 2020. DBRS Morning also added the Interest in Arrears designation to Class F.

The downgrades and Negative trends are largely the result of a larger-than-expected loss for one loan, as further discussed below, and DBRS Morningstar’s negative outlook for some of the remaining loans in special servicing. In general, these concerns reflect previous performance declines for the affected collateral that is now expected to be exacerbated amid the effects of the Coronavirus Disease (COVID-19) global pandemic.

The Creekside Mixed Use Development (Prospectus ID#15; formerly 2.0% of the pool) was disposed in June 2020, resulting in a substantial loss to the unrated Class G certificates. The loan was secured by the borrower’s fee and leasehold interest in a Class A, mixed-use property in Gahanna, Ohio. The collateral was comprised of retail space, office space, and 84 multifamily units. The loan transferred to special servicing in September 2014 and became real-estate owned (REO) in 2017. The servicer initially listed the property for sale in 2019 and at least two bids were under review before the pandemic hit; however, given the economic uncertainty that came with the coronavirus pandemic, both bids were ultimately revised down by significant amounts and the July 2020 sale price of $10.0 million was well below the $17.6 million appraisal amount from November 2019. The loss of just over $24.0 million was contained to the unrated bonds, but has significantly reduced credit support for the lowest rated classes, contributing to the rating downgrades and Negative trend assignments.

As of the February 2021 remittance, 50 of the original 59 loans remain in the pool, representing a collateral reduction of 15.3% since issuance. Ten loans, representing 7.5% of the current pool balance, are fully defeased. Additionally, there are 10 loans, representing 23.5% of the current trust balance, on the servicer’s watchlist as of the February 2021 remittance. The servicer is monitoring these loans for a variety of reasons, including low debt service coverage ratio (DSCR) and occupancy issues; however, the primary reason for the increase of loans on the watchlist is the coronavirus-driven stress for retail and mixed-use properties, with watchlisted loans backed by those property types generally reporting a low DSCR.

As of the February 2021 remittance, the pool has four loans, representing 16.8% of the pool in special servicing. The four loans in special servicing are Excelsior Crossings (Prospectus ID#3; 8.0% of the pool), Canyon Crossing (Prospectus ID#8; 4.2% of the pool), Clemson Student Housing (Prospectus ID#12; 3.0% of the pool), and Beltway 8 Corporate I (Prospectus ID#19; 1.4% of the pool). In addition, the transaction has a higher concentration of retail properties, representing 22.5% of the pool, with 16 loans secured by both anchored and unanchored retail properties.

In the analysis for this review, DBRS Morningstar assumed a liquidation scenario for one loan in special servicing, Canyon Crossing. The loan is secured by an anchored retail center in Riverside, California, located approximately 55 miles east of Los Angeles. In early 2018, Toys “R" Us (formerly 24.8% of the net rentable area (NRA)) and Howard’s Appliance and Big Screen (formerly 6.2% of NRA) both left the property, resulting in a steep decline in occupancy. The loan first transferred to special servicing in November 2018 and the property became REO in September 2019.

According to the September 2020 appraisal, the property was valued at $43.2 million, a 30.8% decline from the issuance value of $62.9 million. The 2020 value implies an in-place loan-to-value ratio of 98.0%, compared with 71.1% at issuance. The borrower failed to backfill the vacant anchor box prior to the pandemic, and finding a replacement tenant in a stressed retail environment has proven to be a challenge. In the liquidation scenario, a substantial haircut was applied to the 2020 value given the extended period of elevated vacancy for the property prior to the onset of the pandemic that is likely to be exacerbated by the effects of the pandemic-related uncertainty, resulting in a loss severity of approximately 24.8%.

DBRS Morningstar is also closely monitoring another loan in the Beltway 8 Corporate I loan that transferred to special servicing with the February 2021 remittance. The loan is secured by a two-story, Class A suburban office building in Houston, Texas. The property was previously 100% leased to two tenants, Cameron International Corporation (51.3% of the NRA before vacating the property in February 2021) and the remaining tenant, Sava (48.7% of the NRA through December 2028). Cash flows at the property have been depressed since 2018 when the borrower gave Sava a year of free rent as part of its lease renewal. With the largest tenant vacating the property, cash flows will be insufficient to cover debt service payments. According to the most recent financials, there is $1.3 million in a lease sweep reserve account that was collected as part of a trigger event related to the largest tenant’s lease expiry. The Houston office market is generally challenged and the Northwest submarket metrics are undesirable, with Reis showing a 2020 vacancy rate of 29.6% up from 27.7% the year prior. This loan was analyzed with a significantly increased probability of default to increase the expected loss in the analysis for this 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-A and X-B 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 the following loans in the transaction:

-- Prospectus ID#3 – Excelsior Crossings (8.0% of the pool)
-- Prospectus ID#8 – Canyon Crossing (4.2% of the pool)
-- Prospectus ID#12 – Clemson Student Housing (3.0% of the pool)
-- Prospectus ID#19 – Beltway 8 Corporate I (1.4% of the pool)

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 6, 2020), 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

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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