DBRS Morningstar Changes Trends on Seven Classes of JPMBB Commercial Mortgage Securities Trust 2014-C25 to Negative, Confirms All Ratings

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-C25 issued by JPMBB Commercial Mortgage Securities Trust 2015-C25 as follows:

-- Class A-4A1 at AAA (sf)
-- Class A-4A2 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class EC at A (high) (sf)
-- Class X-C at AA (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at B (low) (sf)
-- Class X-E at B (sf)
-- Class F at CCC (sf)

The trends on Classes C, EC, D, E, X-C, X-D, and X-E were changed to Negative from Stable. The trends on the remaining classes are Stable, with the exception of Class F, which has a rating that does not carry a trend.

The Negative trends primarily reflect DBRS Morningstar’s increasing concerns surrounding the pool’s exposure to the office space sector and the potential refinance risk of certain loans given their upcoming 2024 scheduled maturities. The pool is most concentrated by office properties, which represent 38.4% of the pool, including the City Place (Prospectus ID #1; 11.6% of the pool) and 9525 West Bryn Mawr Ave (Prospectus ID#10; 2.9% of the pool) loans. For this review, DBRS Morningstar increased the probability of default (POD) assumptions for these two loans, given the increased risks of either tenant rollover or increased vacancy rate. Office space supply is on the rise because of low space utilization amid the pandemic and the resulting change in workers’ preferences, a dynamic that has led to an increase in office space being offered for sublease and tenants downsizing or vacating.

One of the office loans that DBRS Morningstar has particular concerns about, 9525 West Bryn Mawr Ave, was added to the servicer’s watchlist in August 2022 for performance-related issues following the departure Life Fitness (32.7% of the net rentable area (NRA)), which vacated its space upon lease expiration at YE2021. The loan is secured by a 246,841 square foot (sf) office property in Rosemont, Illinois. As a result of the increased vacancy rate, financials have plummeted, most recently reporting a net cash flow (NCF) of -$314,190 and a debt service coverage ratio (DSCR) of 0.37 times (x) for the trailing six months ended June 30, 2022, compared with the NCF of $3.8 million and DSCR of 2.19x for YE2021, and the NCF of $2.7 million and DSCR of 1.55x for YE2020.

According to the servicer’s commentary, however, the borrower has had some recent leasing momentum, signing Chicago Mortgage (22.4% of NRA) to a short-term lease through June 2025 and re-signing Life Fitness (22.8% of NRA) to a portion of its former space through February 2030 (the Life Fitness lease is currently with the servicer for consent). With both tenants in place, this would boost the property’s occupancy rate to approximately 73.0%. According to Q4 2022 Reis data, office properties in the O’Hare submarket reported an average effective rental rate of $21.22 per square foot (psf) and an average asking rental rate of $27.59 psf, compared with the subject property’s average in-place rental rate of $17.28 psf, which is exclusive of Life Fitness’ rent upon lease execution. Reis also reported that the O’Hare submarket had a vacancy rate of 22.8%, an increase over the YE2021 and YE2020 rates of 22.0% and 22.5%, respectively. Given the performance declines coupled with the soft submarket conditions, DBRS Morningstar elevated the POD for this loan to increase its expected loss.

Outside of the office sector exposure discussed above, the rating confirmations and Stable trends reflect the otherwise continued performance of the transaction, with the remaining loans in the pool generally having experienced minimal changes since the last rating action. As of the March 2023 remittance, 52 of the original 65 loans remain in the trust with an aggregate principal balance of approximately $885.2 million, representing a collateral reduction of 25.1% since issuance as a result of loan repayments, scheduled amortization, and loan liquidations. The pool benefits from 12 loans, representing 15.5% of the pool, that are fully defeased. Seven loans, representing 10.9% of the pool, are on the servicer’s watchlist and three loans, representing 8.4% of the pool, are in special servicing.

To date, four loans have been liquidated from the trust with losses totaling $14.0 million contained to the nonrated Class NR Certificate, which has been reduced by nearly 30% to $37.4 million. With this review, DBRS Morningstar maintained its liquidation approach on two loans, applying haircuts to the most recent appraisals that result in an implied loss to the trust of approximately $21.5 million, further eroding the credit support provided to the more junior classes.

The largest loan in special servicing, Hilton Houston Post Oak (Prospectus ID#6; 4.6% of the pool) is secured by a luxury hotel in Houston. The loan transferred to special servicing in May 2020 for imminent monetary default and has been real estate owned since September 2022. Although the loan’s transfer to special servicing came with the onset of the Coronavirus Disease (COVID-19) pandemic, the loan was significantly underperforming its issuance expectations for several years prior to the 2020 default. A November 2022 appraisal obtained by the servicer valued the property at $67.5 million, reflecting moderate growth from the previously reported figures of $65.3 million in 2021 and $57.5 million in 2020, but remaining well below the issuance value of $126.2 million, reflecting an overall decline in value of 46.5% since issuance. With this review, DBRS Morningstar maintained its liquidation of this loan from the trust, with an implied loss of nearly $17.0 million or a loss severity in excess of 40%.

The second-largest loan in special servicing, Southport Plaza (Prospectus ID#13; 2.8% of the pool), is secured by a 192,080-sf mixed-use property in Staten Island, New York. The loan transferred to special servicing in June 2020 for payment default and is delinquent as of the March 2023 reporting. The lender is currently negotiating with the borrower to replace the deceased guarantor while at the same time working to implement a receiver and pursuing foreclosure. Per the July 2022 rent roll, the property was 86.9% occupied, above the 82.2% occupancy rate at YE2021, but below the 97.0% rate at issuance. The largest tenants are Supreme (33.6% of the NRA, lease expiry in December 2026), Conduent (30.7% of the NRA, lease expiry in March 2024), and VNS Choice (5.5% of the NRA, lease expiry in June 2027). Three tenants, representing 32.7% of the NRA, have scheduled lease expirations within the next 12 months, including the second-largest tenant. Additionally, LoopNet currently lists the space currently occupied by the largest tenant, Supreme, as available for lease, signaling that tenant’s potential departure prior to lease expiration.

The most recent appraisal obtained by the special servicer is dated November 2022 and valued the property at $38.4 million, marking a 28.9% decline from the appraised value of $54.0 million at issuance. Based on the loan’s current total exposure and the November 2022 appraisal, the loan-to-value ratio was still moderate at 67.0%, however, given that the special servicer’s workout strategy involves a potential foreclosure and with occupancy concerns about the largest two tenants (combining for 64.3% of the NRA), DBRS Morningstar remains concerned about the refinance prospects for this loan, which has had a prolonged time for resolution. As a result, DBRS Morningstar increased the POD for this loan in its analysis to increase the loan’s expected loss.

Environmental, Social, and 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-B, X-C, X-D, and X-E 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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023), https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022), https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022), https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022), https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008

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