DBRS Morningstar Confirms All Ratings on COMM 2014-UBS5 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-UBS5 issued by COMM 2014-UBS5 Mortgage Trust as follows:

-- Class A-2 at AAA (sf)
-- 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 X-B1 at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class X-B2 at BB (high) (sf)
-- Class D at BB (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

All trends are Stable, with the exception of Classes E and F, which are assigned ratings that do not typically carry a trend in Commercial Mortgage Backed Securities ratings.

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 and lodging properties, which represent 30.4% and 25.0% of the current pool balance, respectively. These loans include three top-ten loans, two of which are delinquent and the other, which is current, but is 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 and in those cases, DBRS Morningstar has increased the expected loss in the analysis to reflect those increased risks. The C (sf) and CCC (sf) ratings for the bottom two rated classes are reflective of liquidation scenarios assumed for defaulted loans expected to be resolved with a loss, with the trust previously realizing losses of approximately $25.0 million. To date, losses have been contained to the unrated Class G. In addition to the remainder of the unrated Class G balance, there is $182.6 million of below investment-grade cushion for this transaction, including the BB (sf) rated Class D with a balance of $104.2 million.

At issuance, the transaction consisted of 70 fixed-rate loans secured by 94 commercial and multifamily properties, with a trust balance of $1.42 billion. As of the February 2023 remittance, 56 loans remain within the transaction with a trust balance of $1.04 billion, reflecting total collateral reduction of 26.5% since issuance. There are currently 17 fully defeased loans, representing 25.0% of the pool. Five loans, representing 11.2% of the pool, are currently in special servicing, and seven loans, representing 9.9% of the pool, are on the servicer’s watchlist.

DBRS Morningstar is projecting the largest liquidated loss amount for the pool’s fourth-largest specially serviced loan, The Campus at Greenhill (Prospectus ID#19, 2.1% of the pool). The loan is secured by a three-story, 287,970-square-foot (sf) Class A office building in Wallingford, Connecticut. The property has been underperforming since August 2017, when the largest tenant, Anthem Blue Cross Blue Shield (Anthem), exercised an early termination option for a portion of its lease and vacated approximately 67,000 sf of space. As part of the early termination agreement, Anthem paid a $1.3 million termination fee. Occupancy at the property subsequently declined to 76.0% from 89.0%, and the loan transferred to the special servicer in September 2017 after falling delinquent. In January 2018, it was revealed that the borrower had failed to deposit Anthem's lease termination fee with the lender and Anthem filed a lawsuit for breach of contract against the borrower, which was reportedly settled. According to the servicer, the lender has also filed a lawsuit for breach of contract; however, in May 2019, the servicer reported its intent to proceed with the foreclosure and that the guarantor agreed to pay $1.2 million over 12 months in order to settle the lender's claim. According to the most recent reporting on file, dated June 2022, occupancy at the property remains relatively unchanged at 77.0%, and the debt service coverage ratio (DSCR) remains below breakeven at 0.14 times (x). The most recent appraisal, dated November 2022, reported an as-is value of $9.6 million, 10.3% lower than the July 2021 value of $10.7 million and 67.8% lower than the issuance value of $34.4 million. DBRS Morningstar applied a 15.0% haircut to the most recent appraisal value in its liquidation scenario, with the resulting figure suggesting a loss severity approaching 100% could be realized.

The second-largest specially serviced loan, Harwood Center (Prospectus ID#15, 2.6% of the pool), is secured by the leasehold interest in an office building in downtown Dallas. The sponsor’s troubles with this loan followed the downsizing of a major tenant and the loan transferred to special servicing in May 2020, with a foreclosure ultimately filed and the title to the property transferred to the trust in November 2021. According to the servicer, the lender is working to lease-up and stabilize the asset, including renovating the property throughout 2023. The most recent appraisal on file is dated June 2022, which reported an as-is value of $75.9 million, a marginal decrease from $78.0 million in July 2021, but a 61.2% decline from the issuance value of $124.0 million. DBRS Morningstar applied a 15.0% haircut to the most recent appraisal value in its liquidation scenario, resulting in a loss severity in excess of 50.0%.

The largest loan on the servicer’s watchlist, Towne Park Ravine I, II and III (Prospectus ID#10, 3.7% of the pool), is secured by a three-property, 367,090-sf suburban office park in Kennesaw, Georgia. Historically, the collateral has performed well, with occupancy rates above 90.0%; however, the loan was added to the servicer’s watchlist in November 2020 after three top-ten tenants vacated the property upon their lease maturities, driving occupancy and cash flow downward. The borrower has been unable to backfill the majority of the vacant space and, as of YE2022, the servicer-reported occupancy rate was 63.2% with a DSCR of 1.1x. Likewise, net cash flow remains stressed with the YE2022 figure 12.3% lower than the YE2021 figure and 30.7% lower than the issuance figure. The rent roll is relatively granular with no tenant representing more than 10.0% of the net rentable area (NRA). The largest tenants at the property are The Impact Partnership, LLC (25,699 sf; 7.0% of NRA), Accelerated Claims, Inc. (23,111 sf; 6.3% of NRA), Breckenridge Insurance Services, LLC (19,059 sf; 5.2% of NRA), and Hapag-Lloyd Inc. (13,635 sf; 3.7% of NRA). Of these tenants, only one, The Impact Partnership, LLC, has a lease expiration date prior to loan maturity in August 2024. Tenants representing an additional 9.0% of NRA have lease expirations within the next 12 months; however, the borrower has reported that leasing activity has begun to pick up, with six new prospective leases totaling 52,000 sf of space in the pipeline. DBRS Morningstar applied an elevated probability of default penalty in its analysis to reflect the current risk profile and increase the expected loss for this loan.

The fourth-largest loan in the pool, State Farm Portfolio (Prospectus ID#7, 5.3% 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 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 DSCR of approximately 2.0x, 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.

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 (May 17, 2022).

Classes X-A, X-B1, and X-B2 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 the North American CMBS Surveillance Methodology (October 3, 2022), which was recently updated on March 16, 2023 (the updates were deemed to be not material) and 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].

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