DBRS Morningstar Downgrades Ratings on Five Classes, Changes Trends to Negative on Seven Classes of JPMBB Commercial Mortgage Securities Trust 2015-C31

DBRS Limited (DBRS Morningstar) downgraded its ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C31 issued by JPMBB Commercial Mortgage Securities Trust 2015-C31 as follows:

-- Class C to BBB (sf) from A (low) (sf)
-- Class EC to BBB (sf) from A (low) (sf)
-- Class X-C to BBB (high) (sf) from A (sf)
-- Class D to B (high) (sf) from BB (low) (sf)
-- Class X-D to BB (low) (sf) from BB (sf)

DBRS Morningstar also confirmed its ratings on the following classes:

-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

Additionally, DBRS Morningstar changed the trends on Classes B, C, D, X-B, X-C, X-D, and EC to Negative from Stable. Classes E and F have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. The trends on Classes A-3, A-SB, A-S, and X-A are Stable.

At the last rating action in November 2022, DBRS Morningstar downgraded Classes E and F to CCC (sf) and C (sf), respectively, and changed the trends on Classes D and X-D to Stable from Negative. The rating downgrades with the November 2022 review were driven by concerns surrounding the largest loan in the pool, the Civic Opera Building (Prospectus ID#2, 10.3% of the pool), with losses projected based on a February 2021 appraisal (the most recent at the time of the review). Since that time, however, a September 2022 appraisal has been provided, showing further value decline—that development, along with increased concerns surrounding the high office concentration (and underperforming office loans) in this pool support the rating downgrades and Negative trends with this review. Office properties and mixed-use properties with some office component back loans representing 32.6% of the pool balance. Where applicable, DBRS Morningstar applied probability of default (POD) and/or loan-to-value stresses in the analysis to increase the expected loss. As a result, the loan-level expected losses for the office loans averaged a 70% increase over the expected loss for the pool as a whole.

As of the March 2023 remittance, 51 of the original 58 loans remained outstanding with a pool balance of approximately $801.6 million, representing a collateral reduction of 22.0% since issuance. Of the remaining loans, 14 loans, representing 24.4% of the pool balance, have been fully defeased. Four loans are in special servicing, totaling 20.0% of the pool balance, including the two largest office loans in the pool. In addition, 16 loans, totaling 22.6% of the pool balance, are on the servicer’s watchlist.

The largest loan in special servicing, the Civic Opera Building, is secured by the borrower’s fee-simple interest in a Class B office property in Chicago’s West Loop District. The loan is part of a pari passu whole loan, with a companion note in the JPMBB 2015-C32 transaction, which is also rated by DBRS Morningstar. The loan transferred to special servicing in June 2020 following the borrower’s request for forbearance and has been delinquent since May 2021. According to the most recent servicer commentary, the servicer is pursuing foreclosure.

The most recent appraisal obtained by the special servicer, dated September 2022, valued the property at $159.4 million compared with the February 2021 value of $165.0 million. At issuance, the property was valued at $220.0 million. The property’s occupancy rate continues to fall, most recently reported at 63.7% as of September 2022, when the debt service coverage ratio (DSCR) was well below breakeven at 0.54 times (x). The tenancy is granular, with the largest tenant representing less than 8.0% of the net rentable area, but the submarket is quite soft, particularly for old, Class B office stock that can’t compete with the newer Class A developments situated in the West Loop. Based on a haircut to the most recent appraisal and accounting for outstanding and future advances, DBRS Morningstar assumed a liquidation scenario for this loan, with a loss severity in excess of 45%.

The second-largest office loan in special servicing, Sunbelt Portfolio (Prospectus ID#3, 8.2% of the pool), is secured by the fee-simple interests in a portfolio of three office properties in Birmingham, Alabama, and Columbia, South Carolina. The loan transferred to special servicing in January 2022 for imminent monetary default; the most recent commentary suggests an agreement has been reached with the borrower, and the loan is expected to return to the master servicer in the near term. The portfolio has experienced precipitous occupancy declines in recent years, with the most recent figure showing the properties were 71.5% occupied as of September 2022. Because of the declining occupancy, cash flows have fallen with the September 2022 DSCR at 1.15x, down from 1.34x in YE2021. The portfolio’s location within secondary and tertiary markets will likely trim demand as the sponsor works to build occupancy and recover lost cash flow—these issues will further stress the possibilities for a refinance at loan maturity next year. As such, in the analysis for this review, DBRS Morningstar applied a POD stress to increase the expected loss.

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-B, X-C, and X-D 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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class B, as the quantitative results suggested a lower rating on that class. The analysis for this review included stressed scenarios for several performing office loans given the proximity to maturity and the general stress for that property type in the current environment. The material deviation is warranted given the uncertain loan-level event risk for those loans.

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
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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 (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

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