DBRS Morningstar Confirms All Ratings on COMM 2014-UBS4 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-UBS4 issued by COMM 2014-UBS4 Mortgage Trust 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 X-B at A (high) (sf)
-- Class C at A (sf)
-- Class PEZ at A (sf)
-- Class D at BBB (low) (sf)
-- Class X-C at B (high) (sf)
-- Class E at B (sf)
-- Class X-D at B (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect DBRS Morningstar’s current outlook and loss expectations for the transaction, which remain relatively unchanged from the November 2022 review. Although the pool is generally stable, it is noteworthy that there is a high concentration of loans collateralized by office properties, which represent more than 30% of the current pool balance. Those loans include the two largest loans in the pool, one of which is delinquent and the other of which is current but showing some challenges related to dark space across the collateral office portfolio. In addition to these loans, there are select others showing increased risks from issuance. However, in addition to loan-level factors mitigating risks in some cases, DBRS Morningstar also notes that the transaction as a whole benefits from increased credit support to the bonds as a result of scheduled amortization and loan repayments, as well as significant defeasance.

At issuance, the transaction consisted of 91 fixed-rate loans secured by 124 commercial and multifamily properties, with a trust balance of $1.29 billion. As of the January 2023 remittance, 80 loans remain within the transaction with a trust balance of $1.0 billion, reflecting total collateral reduction of 21.72% since issuance. There are currently 28 fully defeased loans, representing 13.8% of the pool. Six loans, representing 13.1% of the pool, are currently in special servicing, and 17 loans, representing 25.5% of the pool, are on the servicer’s watchlist.

The largest loan in the pool, State Farm Portfolio (Prospectus ID#1; 12.7% of the pool), is a pari passu loan secured by 14 cross-collateralized and cross-defaulted properties spread across 11 states. The portfolio properties were 100% occupied by State Farm Mutual Automobile Insurance Company (State Farm) at issuance, with all but two of the leases running through 2028. The leases remain in place, but the physical occupancy rate has declined in recent years. State Farm as a company has reportedly transitioned to a hybrid/flex model in the United States, with the workforce rotating between on-site and remote work. News reports have suggested that a majority of the office locations backing the subject loan have been vacated, or use has been significantly reduced; despite these developments, the loan is not on the servicer’s watchlist.

The portfolio is generally located across secondary markets in the Midwest and Eastern United States; the largest three by allocated loan balance are located in Charlottesville, Virginia; Murfreesboro, Tennessee; and Malta, New York (a total of 36% of the allocated balance). These locations will be more difficult to sublease given the lower demand for office space and the slowdown in leasing across the office sector that has been affecting the country as a whole for the past few years. Given that the majority of lease expirations are four years past the loan’s scheduled 2024 anticipated repayment date ((ARD); final maturity is scheduled for April 2029), refinance risk, rather than term risk, is the primary concern. The loan structure requires the loan’s interest rate to increase significantly if the ARD is not met, and a cash flow sweep would also be initiated in the event of a missed ARD. The loan has historically covered at a debt service coverage ratio (DSCR) of approximately 2.0 times (x), suggesting there should be excess cash to sweep and reserve for the remainder of the State Farm lease periods through the final maturity date in 2029.

The largest specially serviced loan and the second largest loan in the pool, 597 Fifth Avenue (Prospectus ID#2; 10.4% of the pool), is secured by two adjacent mixed-use properties in Manhattan’s Midtown neighborhood. The property consists of 80,032 square feet (sf) of Class B office and ground-floor retail space. The loan transferred to the special servicer in October 2020, at which time a new leasing and management firm was appointed, and a consent agreement was approved allowing for the use of reserves to fund debt service payments. The loan was subsequently brought current and paid through to October 2022, when the reserve account was depleted. The loan is currently over 60 days delinquent and is being cash managed. A significant discounted-payoff proposal made by the borrower was ultimately rejected by the special servicer, who is reportedly dual-tracking foreclosure and receivership proceedings while pursuing potential alternatives with the borrower.

Cash flows at the property have been in flux since Sephora vacated the ground-floor retail space in 2017. The space was later taken by Lululemon on a short-term basis; however, Lululemon’s departure in 2020 (formerly 10.0% of net rentable area (NRA)) caused significant cash flow declines, given that 80% of the asset’s total base rent had historically been generated by the retail tenant. Club Monaco, which was purchased in June 2021 by Regent, L.P. (Regent), a global private equity firm, has since taken over the space on a short-term lease expiring in 2023, roughly one year prior to loan maturity. The prospect of Club Monaco renewing its lease at the property remains uncertain, especially if the sponsor attempts to reset the tenant’s rental rate to market. According to the June 2022 rent roll, Club Monaco was paying approximately $285 per square foot (psf), far below the submarket average of $2,000 psf for retail properties in the Upper Fifth Avenue corridor.

The property was 71.4% occupied according to the June 2022 rent roll, with Club Monaco occupying 12,229 sf (14.6% of the NRA). Cash flow at the property has declined consistently since issuance, with the annualized June 2022 figure of $3.4 million significantly below the issuance figure of $7.4 million, but above the YE2021 figure of $1.9 million. Likewise, the DSCR has declined from 1.5x at issuance to 0.34x as of June 2022. Although the general performance of retail space along the Fifth Avenue corridor has improved in recent months, DBRS Morningstar remains concerned about the property’s sustained occupancy and cash flow declines as well as the loan sponsor, Joseph Sitt of Thor Equities, who retains positions in other properties that are in various states of delinquency and/or foreclosure. While the collateral’s value has likely declined in recent years, the issuance appraisal implies a loan-to-value ratio of 58.3%, suggesting significant cushion exists.

DBRS Morningstar did not perform an updated model run given the lack of meaningful changes in performance since the last review, conducted in November 2022. As of the previous actions published on November 4, 2022, material deviations from the North American CMBS Insight Model were reported for Class E, as the quantitative results suggested higher ratings. The material deviations were warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer's watchlist.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Class X-A, X-B, X-C, and X-D are 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 the North American CMBS Surveillance Methodology (https://www.dbrsmorningstar.com/research/403563; October 3, 2022), 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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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