DBRS Morningstar Downgrades Ratings on Four Classes of JPMBB Commercial Mortgage Securities Trust 2015-C27, Confirms Remaining Classes

DBRS Limited (DBRS Morningstar) downgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by JPMBB Commercial Mortgage Securities Trust 2015-C27:

-- Class X-C to A (low) (sf) from A (sf)
-- Class C to BBB (high) (sf) from A (low) (sf)
-- Class EC to BBB (high) (sf) from A (low) (sf)
-- Class E to C (sf) from CCC (sf)

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

-- Class A-3A1 at AAA (sf)
-- Class A-3A2 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 AA (sf)
-- Class B at AA (low) (sf)
-- Class D at CCC (sf)
-- Class F at C (sf)

With this review, DBRS Morningstar maintained the Negative trends on Classes C, EC, and X-C. All other trends are Stable with the exception of Classes D, E and F, which are assigned ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings.

The rating downgrades and the Negative trends are reflective of DBRS Morningstar’s continued concerns regarding the loans in special servicing, representing 22.8% of the pool balance, all of which are in the top 10 and are discussed below. In addition, the pool is concentrated by property type with office representing 38.2% of the pool balance. Some of those loans, including two in special servicing (collectively representing 10.5% of the pool balance) and three loans on the servicer’s watchlist (collectively representing 6.7% of the pool balance), are showing performance challenges that suggest increased risks since issuance. Given the shift in demand for office space following the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar anticipates upward pressure on vacancy rates in the broader office market, challenging efforts to backfill vacancies and contributing to the larger trends showing value declines, particularly for assets located in non-core markets and/or with disadvantages in location, building quality, or amenities offered. As part of this review, DBRS Morningstar increased the probability of default (POD) for all of the distressed loans to reflect their current risk profile and, in certain cases, applied stressed loan-to-value (LTV) ratios to the top 20 loans in the pool that are secured by office properties. In some cases where significant performance declines were observed, the analyzed LTVs were quite high, ranging between 150% and 230%. The largest specially serviced loan, The Branson at Fifth (Prospectus ID#3; 12.0% of the pool), was analyzed with a liquidation scenario.

In addition to the projected losses from the liquidated loans and other loans showing value declines from issuance, the rating downgrades and the CCC (sf) and C (sf) ratings on the most junior rated tranches are also reflective of the expectation that interest shortfalls could continue to grow. As of the March 2023 remittance, shortfalls totaled $4.1 million, with shortfalls reported up through the Class D certificate.

According to the March 2023 remittance, of the original 44 loans, 35 remain in the pool with an aggregate principal balance of $595.5 million, representing a collateral reduction of 28.8% since issuance as a result of scheduled loan amortization and loan repayments. Five loans, representing 5.4% of the pool, are fully defeased. Eleven loans, representing 20.1% of the pool, are on the servicer’s watchlist for low debt service coverage ratios (DSCRs) and/or occupancy rates.

The Branson at Fifth is secured by a mixed-use (multifamily and retail) property in Midtown Manhattan, New York. The loan was transferred to special servicing for a second time in September 2021 because of insufficient cash flow and was last paid through November 2021. According to the December 2022 financials, the property was 69.5% occupied, with only one commercial tenant (occupying approximately 33.6% of the net rentable area (NRA)) that was paying reduced rent on a month-to-month basis. Cash flows have been reported well below breakeven since YE2019, a trend that began with the loss of the sole commercial tenant at issuance, Domenico Vacca, earlier that year. According to the latest servicer update, while the borrower had paid out of pocket to cover a portion of the accrued interest, the special servicer will continue workout discussions while dual tracking foreclosure. According to the October 2022 appraisal, the property was valued at $38.2 million, a 68.1% decline from the issuance value of $119.0 million and well below the outstanding loan balance of $73.0 million, reflecting an LTV of 192.1%. Given the significant decline in value and tenant rollover risk, DBRS Morningstar analyzed this loan with a liquidation scenario, resulting in a loss severity in excess of 65.0%.

The second-largest loan in special servicing, 717 14th Street (Prospectus ID#4; 6.4% of the pool balance), is secured by a 114,204-square foot office property in Washington, DC. The loan was transferred to special servicing in February 2023 for imminent monetary default after the borrower was unable to fund operating shortfalls. The borrower and special servicer have since initiated the discussion of releasing funds from the lockbox before the payment of debt service in order to fund the operating expense. According to the March 2023 loan level reserve report, the loan reported $798,268 in a rollover reserve, $257,353 in a lockbox reserve, and $28,707 in a replacement reserve. At issuance, the building was fully occupied by the DC Government, General Services Administration - U.S Department of the Treasury, and CVS, which are all investment-grade tenants. According to the most recent financials, occupancy dropped to 64.4% in January 2023 from 79.9% in YE2021, which is predominantly because of the departure of DC Auditors (approximately 9.4% of NRA) in August 2022. In addition, the DC Office of the Inspector General (DC-OIG;10.0% of the NRA) will vacate upon its lease expiration at the end of March 2023, bringing occupancy down to approximately 54%. According to Reis, office properties in the East End submarket reported a YE2022 vacancy rate of 14.8%, in line with the YE2021 vacancy rate. The vacancy rate for DC is forecast to be 12.3% by 2028.

Based on the financials for the trailing nine months ended September 30, 2022, the loan reported DSCR of 1.02 times (x), a drop from the YE2021 DSCR of 1.45x and YE2020 DSCR of 1.61x. Given the performance decline and upcoming departure of DC-OIG, with this review, the loan was analyzed with a stressed LTV and elevated POD. DBRS Morningstar derived a stressed value based on the property’s in-place cash flow adjusted for the loss of DC-OIG’s rent while applying a cap rate on the high end of DBRS Morningstar’s cap rate range for office properties, resulting in an LTV above 200.0%.

4141 North Scottsdale Road (Prospectus ID#9; 4.1% of the pool) is secured by a Class A, low-rise, suburban office building in Scottsdale, Arizona, and was transferred to special servicing in June 2022 for payment default. After several tenants had vacated the property, including the former largest tenant, Aetna, Inc. (previously occupying 71.0% of the NRA) at its lease expiration in December 2021, there has been no leasing activity since YE2021. According to the September 2022 rent roll, the property was occupied by three tenants, reflecting a 16.6% occupancy rate, with the third-largest tenant’s (Acentium Capital; 2.4% of the NRA) lease expiring in November 2023. The borrower initially intended to bring the loan current and simultaneously defease the loan with proceeds from a property sale that was expected to close in September 2022 but ultimately that sale was not executed. The loan defaulted on its April 2022 payment but was brought current with the February 2023 remittance and is expected to be returned to the master servicer after a three-month rehabilitation period. According to Reis, office properties in the Scottsdale submarket reported a YE2022 vacancy rate of 19.0%, a slight decrease from the YE2021 vacancy rate of 20.4%. Generally, the submarket vacancy rate is expected to remain elevated, considering the vacancy rate is forecast to be 18.5% by 2028.

According to the March 2023 loan level reserve report, the loan reported $1.4 million across reserves including $890,751 in a tenant reserve, $88,671 in a lockbox reserve, and $262,170 in a major tenant account. Per the August 2022 appraisal, the property was valued at $29.5 million, 18.3% below the issuance value of $36.1 million but above the outstanding loan balance of $24.6 million, reflecting a current LTV of 83.4%. The borrower’s ability to bring the loan current suggests the borrower remains committed to the loan at this time but given the value decline, low occupancy rate, and the soft submarket, with this review, DBRS Morningstar increased the POD and applied a stressed LTV in its analysis.

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, X-B, and X-C 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 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.

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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