DBRS Morningstar Downgrades Two Classes and Confirms 13 Classes of JPMBB Commercial Mortgage Securities Trust 2014-C26

DBRS, Inc. (DBRS Morningstar) downgraded its ratings on two classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-C26 issued by JPMBB Commercial Mortgage Securities Trust 2014-C26 as follows:

-- Class X-E to B (sf) from BB (low) (sf)
-- Class E to B (low) (sf) from B (high) (sf)

In addition, DBRS Morningstar confirmed its ratings on the following 13 classes:

-- Class A-3 at AAA (sf)
-- Class A-4 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 AA (high) (sf)
-- Class B at AA (sf)
-- Class X-C at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class EC at A (high) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class F at CCC (sf)

DBRS Morningstar changed the trends on Classes D, E, X-D, and X-E to Negative from Stable, while Class F has a rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings. The trends on all other classes are Stable.

The rating actions reflect an increase in DBRS Morningstar’s loss expectations for loans in special servicing, primarily driven by the Heron Lakes (Prospectus ID#4; 4.5% of the pool) loan, as further described below, and the higher-than-expected realized loss attributed to one loan that has been disposed from the pool since the last rating action.

At the last rating action in November 2022, DBRS Morningstar downgraded Class F and changed the trends on Classes D and E to Stable from Negative as two loans were liquidated from the trust with an implied loss of $37.3 million, which was less than 70% of the outstanding balance for the non-rated Class NR at the time. As part of the analysis for this review, DBRS Morningstar liquidated two loans in special servicing from the trust, resulting in an implied loss of approximately $47.7 million. DBRS Morningstar’s projected losses would deplete more than 95% of the outstanding principal balance of the nonrated Class NR and significantly erode the credit support provided to Classes D through F.

The rating actions also reflect the overall increased credit risk to the certificates, as a result of additional concerns for select loans on the servicer’s watchlist and the pool’s concentration of office properties, which total 40.2% of the current pool balance. In general, DBRS Morningstar’s outlook for the office sector has deteriorated in recent months as vacancy rates in many submarkets remain elevated because of a shift in workplace dynamics leading companies opting for remote and hybrid environments to vacate their spaces entirely or reduce their footprint at or prior to their lease expiration dates. Loans secured by office properties had a weighted-average expected loss that was 26% higher than the pool expected loss, excluding Heron Lakes.

The rating confirmations reflect the otherwise stable performance of the transaction, with the remaining loans in the pool having experienced minimal changes since DBRS Morningstar’s last review. As of the March 2023 remittance, 52 of the original 69 loans remain in the trust with an aggregate principal balance of $1.01 billion, reflecting collateral reduction of 30.1% since issuance. In addition, 15 loans, representing 26.0% of the pool, are secured by collateral that has fully defeased. To date, three loans have been liquidated from the pool with realized losses totaling $8.2 million, which have been contained to the nonrated Class NR certificate. Nine loans, representing 22.5% of the pool, are on the servicer’s watchlist, and two loans, representing 6.6% of the pool, are in special servicing.

The largest specially serviced loan and largest contributor to DBRS Morningstar’s loss projections for the pool, Heron Lakes (Prospectus ID#4; 4.6% of the pool), is secured by seven Class A office buildings in the West Belt submarket of Houston. The loan transferred to the special servicer in December 2018 after the borrower filed for bankruptcy. The asset has been real estate owned since February 2020, when the lender foreclosed on the property. Although the pandemic has been the most significant contributor to recent cash flow declines, it is noteworthy that the portfolio has underperformed since 2018, primarily as a result of tenant losses and increasing vacancy rates within the subject’s submarket. Performance has consistently lagged issuance expectations with the occupancy rate and debt service coverage ratio (DSCR) declining from 98.2% and 1.19 times (x) at issuance to 58.0% and -0.05x, respectively, as of October 2021.

The servicer marketed the properties for sale and reportedly received a purchase offer, which was subsequently terminated during the due diligence period. The collateral was last appraised in December 2022 at a value of $22.7 million, down significantly from the 2019 appraisal value of $58.0 million and the issuance appraisal value of $71.0 million. Based on a haircut to the most recent valuation, DBRS Morningstar assumed a full loss for this loan.

The largest loan on the servicer’s watchlist is 1515 Market. The loan is secured by a 502,213-square foot office property in the central business district of Philadelphia. The loan was added to the servicer’s watchlist in January 2023 following declines in occupancy rate and DSCR, which fell to 74.0% and 0.96x, respectively, as of YE2022, down from 79% and 1.19x, respectively, at YE2021 and 83% and 1.47x at YE 2020, respectively. The decline in performance is largely because of the departure of the former second largest tenant, Heffler Radetich & Saitta LLP, representing approximately 4% of net rentable area (NRA) at their lease expiration in August 2021. According to the October 2022 rent roll, there is minimal near-term rollover risk. Tenants occupying 5.6% of the NRA including the third-largest tenant, Commonwealth of Pennsylvania (3.0% of NRA; lease expiry in May 2023) have leases set to expire in 2023, and tenants occupying 3.0% of NRA have leases set to expire in 2024. DBRS Morningstar’s analysis included an elevated probability of default for this loan, as well as an LTV adjustment to reflect the probable value decline of the collateral since issuance. The resulting expected loss was approximately 150.1% higher than the pool average.

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 (May 17, 2022) https://www.dbrsmorningstar.com/research/396929.

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 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 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.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (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)