DBRS Morningstar Confirms Ratings on All Classes of MSBAM 2015-C27, Nine Classes Carry Negative Trends

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C27 as follows:

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

Classes X-D, D, X-E, E, X-F, F, G, X-GH, and H continue to carry Negative trends given DBRS Morningstar’s concerns regarding the performance challenges for some of the loans on the servicer’s watchlist and/or in special servicing, as further detailed below. All other trends are Stable.

At issuance, the transaction consisted of 55 loans secured by 167 commercial and multifamily properties, with an aggregate principal balance of $822.3 million. As of the October 2021 remittance, 52 loans remain in the pool, including six loans (3.1% of the current trust) that have fully defeased. The current trust balance of $730.0 million represents a collateral reduction of 12.8% since issuance. Since the last DBRS Morningstar rating action, the 1 Emerson Lane loan (Prospectus ID#8, 3.8% of the issuance trust balance), which was previously in special servicing, has been repaid in full. The transaction is concentrated by property type as 16 loans, representing 22.6% of the current trust balance, are secured by retail assets, whereas six loans, representing 18.2% of the current trust balance, are secured by hotel assets.

As of the October 2021 remittance, there are three loans in special servicing, representing 9.3% of the current trust balance. While the largest of these loans, the Crowne Plaza – Hollywood loan (Prospectus ID#2, 7.6% of the current trust balance) is expected to be returned to the master servicer as a corrected loan following the finalization of a forbearance agreement, DBRS Morningstar notes the risk for this loan remains elevated as recent reporting shows the hotel’s rebound from Coronavirus Disease (COVID-19) related declines lags behind its competitive set. The loan is secured by a 311-key, full-service hotel located along Ocean Drive in Hallandale Beach. According to the July 2021 STR report, the property reported trailing three-month occupancy, average daily rate (ADR), and revenue per available room (RevPAR) figures of 71.6%, $185, and $133, respectively, reflecting penetration rates of 90.8%, 72.0%, and 65.5%, respectively. At issuance, the subject’s RevPAR was $143, with a penetration rate of 101.4%. Staffing at the property was reduced from 160 to 10 employees at the outbreak of the pandemic and, according to the servicer, rehiring has commenced but filling all needed positions has been a challenge. As of year-end (YE) 2020, the loan reported a debt service coverage ratio (DSCR) of -0.14 times (x), well below historical pre-pandemic figures.

An updated appraisal dated June 2020 valued the property at $65.8 million, a figure that results in a loan to value (LTV) of 85.4% based on total loan exposure as of the October 2021 remittance. The June 2020 value is down 26.0% from the appraised value of $89.0 million at issuance. According to the terms of the loan modification, the borrower is expected to repay advances, currently totaling $2.2 million, by December 2022. The loan sponsor, Sotherly Hotels, Inc. is a self-managed and self-administered lodging real estate investment trust to own, acquire, renovate, and reposition full-service hotel properties located in the mid-Atlantic and southern United States. While the sponsor appears to be committed to the property, the performance lags in comparison to the competitive set, suggesting stabilization could take longer as compared with similarly positioned properties. DBRS Morningstar applied a probability of default (PoD) penalty in the analysis to capture these increased risks and will continue to monitor the loan for developments.

There are also 16 loans, representing 41.3% of the current trust balance, on the servicer’s watchlist as of the October 2021 reporting. These loans are being monitored for a variety of reasons, including low DSCRs, occupancy declines, deferred maintenance issues, and delinquent taxes. Excluding the four loans on the watchlist for deferred maintenance, these loans reported a YE2020 weighted-average DSCR of 1.07x, compared to the YE2019 figure of 1.75x. DBRS Morningstar applied PoD penalties to increase the expected loss for those larger loans on the servicer’s watchlist, which were exhibiting significantly increased risks from issuance.

Despite not being on the servicer’s watchlist, DBRS Morninsgar is monitoring the Granite 190 loan (Prospectus ID#5, 5.5% of the current trust balance) as occupancy has fallen by 20.9% since issuance, with leases for the remaining tenants scheduled to expire prior to loan maturity. The collateral for the loan is a pair of three-story office buildings totaling 307,468 square feet (sf), located in Richardson, Texas, a suburb of Dallas. The subject’s submarket is quite soft, with Reis reporting a vacancy rate of 27% as of Q2 2021, up from 25.9% at YE2019. The occupancy declines have built up over time, with smaller tenants departing in succession between 2018 and March 2021, when United Healthcare (UHC) downsized by 25,555 sf, reducing its footprint from 63.4% of the net rentable area (NRA) at issuance to 56.2% of the NRA on a lease that expires in June 2023. As of June 2021, the property was 76.1% occupied with an average rental rate of $26.12 psf, compared to the average vacancy rate and rental rate as of Q2 2021 within a two-mile radius of the properties of 36.6% and $25.53, respectively.

The property’s second-largest tenant, Parsons Service Company (14.4% of NRA) also has a lease expiration in March 2025 and a termination option in March 2023. The loan is structured with cash flow sweep provisions tied to the 2023 lease roll for UHC, and a termination fee for the 2021 downsize was collected in accordance with the termination provision in the tenant’s lease. According to the October 2021 loan level reserve report, the collateral has $1.1 million in tenant reserve and $0.8 million in other reserves. As of Q2 2021, the loan reported a DSCR of 1.21x, generally in line with the DBRS Morningstar issuance figure of 1.19x. However, the DSCR is expected to decline with the full YE2021 reporting when the loss of rent related to UHC’s downsizing is realized. Given the recent developments paired with the soft market conditions, DBRS Morningstar analyzed this loan with a PoD penalty to increase the expected loss and will continue to monitor the loan for developments.

With this review, DBRS Morningstar has confirmed the investment-grade shadow rating on U-Haul Portfolio (prospectus ID#4, 3.2% of the current trust balance). DBRS Morningstar confirmed that the performance of this loan remains consistent with the investment-grade loan characteristics.

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-D, X-E, X-F, and X-GH 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#2–Crowne Plaza – Hollywood (7.6% of the pool)
-- Prospectus ID#5–Granite 190 (5.5% 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 26, 2021), 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 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 [email protected].

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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 [email protected].

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