DBRS Morningstar Downgrades Ratings on Three Classes of COMM 2014-UBS3 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded its ratings on three classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-UBS3 issued by COMM 2014-UBS3 Mortgage Trust (the Trust) as follows:

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

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

-- Class A-3 at AAA (sf)
-- Class A-4 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 X-B at A (high) (sf)
-- Class C at A (sf)
-- Class PEZ at A (sf)
-- Class D at BBB (low) (sf)

DBRS Morningstar discontinued its ratings on Classes X-C and X-D as they now reference CCC (sf) and C (sf) rated classes. The trend on Class E was changed to Negative from Stable as a reflection of continued concerns surrounding the largest loans in special servicing and on the servicer’s watchlist, as further described below. All remaining classes carry a Stable trend with the exception of Classes F and G, which now have ratings that do not carry trends.

The rating downgrades and Negative trend reflect the decline in performance for two large loans in the transaction since last review. These loans, 1100 Superior Avenue (Prospectus ID#6, 5.6% of the current pool) and Equitable Plaza (Prospectus ID#3, 10.8% of the pool), are further discussed below.

As of the February 2022 remittance, 41 of the original 49 loans remain in the trust, resulting in a collateral reduction of 19.9% since issuance. Defeased loans represent 14.0% of the pool balance. There have been two loans resolved with a loss since issuance, with the combined $15.5 million loss contained to the unrated Class H certificate, which had a remaining balance of $24.1 million as of the February 2022 reporting period. Three loans, representing 6.7% of the current pool balance, are in special servicing, and five loans, representing 14.8% of the current pool balance, are on the servicer’s watchlist.

The largest loan in special servicing, 1100 Superior Avenue, is secured by a 576,766-square-foot (sf) office property in Cleveland, Ohio. The loan transferred to special servicing in June 2021 as a result of imminent monetary default, and the servicer is currently noting the workout strategy as foreclosure, with the borrower reportedly requesting to turn the property over to the trust. Per the servicer commentary, the borrower has advised they are unable to fund the capital costs expected to be incurred over the remaining loan term given the high concentration of scheduled lease expiries for the property. At the time of the last DBRS Morningstar rating action for this deal, in March 2021, the subject loan was reported current and with the master servicer. The year-end (YE) 2019 and YE2020 debt service coverage ratio (DSCR) figures were down from issuance, at 1.19 times (x) and 1.38x, respectively, but occupancy was in line with issuance figures and the loan was not showing any sign of distress at that time. Tenancy is fairly granular, with the largest tenant in place for 17.5% of the net rentable area (NRA) and on a lease that expires in 2025.

The loan was last paid in May 2021 and outstanding advances exceeded $3.0 million as of February 2022. A receiver is in place and the most recently reported financials, dated Q1 2021, showed the DSCR at 1.27x. The most recent appraisal reported by the servicer, dated August 2021, valued the property at $32.1 million, down 54% from the appraised value of $70.0 million at issuance. Based on the updated appraised value, DBRS Morningstar liquidated this asset from the pool in the analysis for this review, with a loss of approximately $28 million. That figure would take out the remainder of the unrated Class H certificate and send losses into the Class G certificate, supporting the downgrade to C (sf) for that class.

The largest loan on the servicer’s watchlist, Equitable Plaza, is secured by a 688,291-sf office property in Los Angeles, California. The loan was placed on the servicer’s watchlist in October 2021 for occupancy-related issues. At YE2019, occupancy was reported at 79%, which increased slightly to 82% at YE2020 before falling once again to 66.0% at June 2021. Occupancy has previously fluctuated since 2018, when the two largest tenants at issuance vacated. Although the loan is current and there is no indication a default is imminent, DBRS Morningstar believes the soft submarket conditions and lack of meaningful cash management provisions significantly increase the risks for this loan given the most recent developments with the property’s occupancy rate. A probability of default penalty was applied to significantly 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#6 – 1100 Superior Avenue (5.6% of the pool)
-- Prospectus ID#3 – Equitable Plaza (10.8% 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 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 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 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 [email protected].

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