DBRS Morningstar Downgrades Four Classes of JPMBB Commercial Mortgage Securities Trust 2014-C26, Changes Trends on Six Classes to Negative

DBRS Limited (DBRS Morningstar) downgraded its ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-C26 issued by JPMBB Commercial Mortgage Securities Trust 2014-C26 as follows:

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

With this review, DBRS Morningstar removed Classes X-E, E, X-F, and F from Under Review with Negative Implications, where they were placed on August 6, 2020.

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

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class X-C at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class EC at A (high) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)

The trends on Classes X-D, D, X-E, E, X-F, and F are Negative; all other trends remain Stable.

The rating downgrades and Negative trends reflect the increased risk of loss to the trust for some of the loans in the pool, generally concentrated in the largest loans in special servicing. As of the February 2021 reporting, there were 17 loans on the servicer’s watchlist, representing 27.7% of the current trust balance. The watchlisted loans exhibit various signs of increased risk, including cash flow and occupancy declines, upcoming tenant rollover, and relief requests submitted by the sponsors in response to the Coronavirus Disease (COVID-19) pandemic. There were three loans, representing 3.64% of the current trust balance, in special servicing (including two loans in the top 15) as of the February 2021 remittance. All but one of these loans have transferred to special servicing since the outbreak of the pandemic.

As of the February 2021 remittance, the trust had an aggregate principal balance of $1.14 billion, representing a collateral reduction of 22.1% since issuance. Since issuance, 11 loans have been repaid in full and one loan was liquidated (the Hilton Garden Inn Houston loan), with a $3.7 million loss contained to the unrated certificates. There are also seven loans, representing 13.3% of the pool, that are defeased. The collateral pool is concentrated by property type, with office properties accounting for 16 loans and representing 42.6% of the current trust balance, followed by retail and lodging, which represent 17.2% and 17.1% of the pool, respectively.

The largest loan in special servicing is Heron Lakes (Prospectus ID#4, 4.3% of the current trust balance), secured by a Class A office complex in Houston. The property has been real estate owned since the servicer’s successful foreclosure in February 2020 and has been in special servicing since December 2018. The most recent appraisal in the servicer’s reporting is dated April 2019, showing an as-is value of $58.0 million, down from $71.0 million at issuance. However, it is likely that the value has fallen significantly since that time given the sustained low occupancy rate for the collateral property and the difficult market dynamics for Houston office properties, which have since been exacerbated amid the pandemic. As such, a liquidation scenario based on a significant haircut to the most recent value was assumed in the analysis for this review, suggesting a loss severity in excess of 70%.

The second-largest loan in special servicing is The Outlets Shoppes of the Bluegrass (Prospectus ID#8, 3.5% of the pool), which is a pari passu loan secured by an outlet mall in Simpsonville, Kentucky, 25 miles east of Louisville. The loan sponsor is a joint venture between CBL & Associates (CBL; 65% ownership interest) and Horizon Group Properties (35% ownership interest). This loan was initially transferred to special servicing in April 2020 for imminent default and was ultimately transferred back to the master servicer at the borrower’s request in June 2020. However, the loan was later returned to special servicing with the February 2021 remittance, following CBL’s bankruptcy filing in November 2020. The collateral property remains generally well occupied as of the most recent reporting available, which showed that the property was 87.8% occupied as of September 2020, when the servicer reported a debt service coverage ratio of 1.42 times. Given the recent transfer back to special servicing, not much information is available on the status of the workout, but the majority owner’s bankruptcy filing is indicative of increased risks for this loan, prompting a probability of default penalty in the analysis for this review to increase the expected loss for the loan.

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, X-B, X-C, X-D, X-E, and X-F 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.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally 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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