DBRS Morningstar Confirms Ratings on All Classes of COMM 2014-UBS2 Mortgage Trust

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

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

All classes carry Stable trends except Class F, which has a rating that does not typically carry a trend.

The rating confirmations and Stable trends reflect the overall performance of the transaction, with the remaining loans in the pool having experienced minimal changes since the last rating action. According to the February 2023 remittance, 46 of the original 59 loans remain in the pool, with an aggregate principal balance of $815.0 million, representing a collateral reduction of 34.1% since issuance as a result of loan repayments, scheduled amortization, and three loan liquidations. In addition, 19 loans, representing 32.9% of the pool, are secured by collateral that has been defeased. One loan, representing 5.0% of the pool, is in special servicing and 11 loans, representing 24.5% of the pool, are on the servicer’s watchlist.

In October 2022, the formerly real estate owned (REO) loan, Beltway 8 Corporate Center I (Prospectus ID#19), was liquidated at a loss of $4.5 million to the trust, lower than the DBRS Morningstar-projected figure of $7.0 million, which resulted in the nonrated Class G being written down by more than 70%. In its analysis for this review, DBRS Morningstar liquidated the remaining REO loan, Canyon Crossing (Prospectus ID#8; 5.0% of the pool), with a projected loss of nearly $9.0 million to the trust, further eroding the transaction’s credit support with projected losses almost completely eroding Class G. The remainder of the loans in the pool are scheduled to mature between Q4 2023 and Q1 2024. Excluding defeasance, the pool had a weighted-average (WA) debt yield of 11.0% based on YE2022 reporting, indicating that the majority of the loans are well positioned.

Excluding defeasance, the pool is most concentrated by office and retail properties, representing 24.2% and 22.5% of the pool, respectively. In recent months, there has been further concern and scrutiny around loans secured by office properties. In the wake of the Coronavirus Disease (COVID-19) pandemic, the dynamic of rising office supply and changing worker preferences has led to an increase in space being offered for sublease and tenants downsizing or vacating. Loans secured by office properties had a WA debt yield of 10.8%, based on the most recent financials available.

The largest loan on the servicer’s watchlist, Excelsior Crossings (Prospectus ID#3; 7.9% of the pool), is secured by two Class A office buildings in Hopkins, Minnesota, approximately 10 miles from the Minneapolis central business district. The loan was originally added to servicer’s watchlist in July 2017 after the sole tenant, Cargill, terminated its lease ahead of its scheduled expiration in March 2018. Although the borrower was able to collect $9.5 million of funds from a cash flow sweep and termination fees, and secured U.S. Bank (59.0% of the NRA, expiring September 2030) and Digi International Inc. (10.8% of the NRA, lease expiring January 2032) as replacement tenants for some of the vacant space, the loan transferred to special servicing in December 2020 for imminent monetary default.

The borrower subsequently entered into a purchase and sale agreement with Bridge Investment Group, LLC, which included a large equity infusion of roughly $19.0 million to bring the loan current and to fund an all-purpose reserve and a debt service reserve. The loan was returned to the master servicer as a corrected loan in May 2022. While net cash flow (NCF) has fallen precipitously since Cargill’s departure, most recently reporting an annualized NCF figure of $2.5 million and a debt service coverage ratio (DSCR) of 0.45 times (x) as of Q3 2022, the borrower has leased the property to 87.1% according to the September 2022 rent roll, signing Michael Foods, Inc. (8.6% of the NRA, lease expiring April 2033) in Q2 2022. Factoring in the additional rental revenue, the loan reported a DSCR of 0.45x, according to the year-to-date September 2022 financial reporting. The December 2021 appraisal reported the property value at $92.0 million, a large decline from the issuance value of $141.0 million, reflecting a loan-to-value ratio of 72.7%; however, value is likely improved given the recent leasing action with approximately $1.8 million of reserves remaining to further stabilize the property.

The second-largest loan on the servicer’s watchlist, One North State Street (Prospectus ID#6; 6.0% of the pool), is secured by a 170,507-square foot (sf) retail vertical subdivision of a 713,423-sf, 16-story, mixed-use office and retail building in Chicago. This loan has been on the watchlist since March 2022 as the largest tenant, Burlington Coat Factory (Burlington;35.2% of the NRA), did not renew its lease ahead of its February 2023 lease expiration; the loan subsequently became cash managed. According to servicer commentary, the tenant has signed an extension, but only for one year. Burlington represents nearly 40.0% of the property rental income, so should the tenant decide to vacate upon expiration, coverage would likely fall below breakeven. As of September 2022, the collateral was 95.2% occupied, with an annualized NCF of $4.9 million (a DSCR of 1.07x) for the trailing nine months ended September 30, 2022, in line with the pre-pandemic figure of $4.5 million (a DSCR of 1.21x) as of YE2019.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no environmental, social, or 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 (May 17, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (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. 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 [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577