DBRS Morningstar Confirms All Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23

DBRS Limited (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2015-C23 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23:

-- Class A-3 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 AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PST at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at BB (low) (sf)
-- Class X-FG at B (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which continues to perform in line with DBRS Morningstar’s expectations since the last rating action. The transaction benefits from significant improvements in hotel assets and the overall stable performance of office assets.

As of the June 2023 remittance, 66 of the original 75 loans remain in the pool with a current trust balance of approximately $850.4 million, representing a collateral reduction of 20.7% since issuance. Thirteen loans representing 9.0% of the current pool balance are fully defeased. Seven loans representing 5.1% of the pool are on the servicer’s watchlist, and two loans representing 3.7% of the pool are in special servicing. The pool displays property type concentration, with office assets representing around 20% of the pool, including three loans of the top 10 loans. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. In the analysis for this review, loans backed by office and other properties that were showing declines from issuance or otherwise exhibiting increased risks from issuance were analyzed with stressed scenarios to increase expected losses as applicable. As a result, these loans exhibited a weighted-average expected loss that was about 25.0% greater than the pool average.

The second largest office loan, Fairfax Corner (Prospectus ID#3, 6.9% of the pool), is secured by a 182,331 square foot of open-air retail and office space across 10 buildings in Fairfax, Virginia, is the primary driver of the elevated expected loss in the pool, mainly attributed to its high tenant rollover risk amid a challenged office submarket environment. According to the December 2022 rent roll, tenants representing around 30% of the net rentable area (NRA) have leases that expired or will be expiring within the next 12 months. In addition, Reis reported a Q1 2023 vacancy rate of 24.4% and an effective rental rate of $26.73 per square foot (psf), compared with the Q1 2022 vacancy rate of 24.6% and effective rental rate of $26.49 psf. Overall, the subject’s March 2023 occupancy rate of 94.6% and average rental rate of $39.38 psf outpaces the submarket and the largest tenant, REI (12.6% of NRA) has a lease extending to September 2033, well past loan maturity, the significant tenant rollover risk and general submarket conditions suggests there may be challenges backfilling space. DBRS Morningstar has requested additional information from the servicer regarding the leasing strategy over the upcoming 12 months as well as the marketing initiatives for spaces that are projected to be vacant. In terms of the subject’s financial performance, the YE2022 debt service coverage ratio was reported at 1.37 times (x) as compared with 1.26x at YE2021 and 1.15x at YE2020. Given the soft submarket and significant tenant rollover risk, DBRS Morningstar applied a stressed loan-to-value ratio (LTV) and a probability of default penalty (POD) in its analysis, resulting in an expected loss that is around 25% greater than the pool average.

There are two loans secured by multifamily properties, Aviare Place Apartments (Prospectus ID#16, 2.5% of the pool) and Hawthorne House Apartments (Prospectus ID#24, 1.5% of the pool), both of which are in special servicing. The two neighboring properties are located in Midland, Texas, and were transferred to special servicing in December 2021 for payment default. According to the servicer, loan modifications were executed in May 2022 and both loans were brought current. The terms of the modification included a conversion to interest-only (IO) payments, three one-year extension options available subject to debt yield hurdles, repayment of deferred interest amounts over a 12 month period beginning in September 2022, as well as funding an all-purpose reserve of approximately $100,000 for both loans. Although both properties are well occupied with the March 2023 occupancy rates higher than 90.0%, revenue has dropped from issuance expectations because of concessions and low rents charged as the area relies heavily on the oil and gas industry, coupled by the challenges occurring from the Coronavirus Disease (COVID-19) pandemic. In addition, expenses have experienced a slight increase as well from issuance expectations. The properties were recently appraised in February 2022 with values reported for the Aviare Place Apartments and Hawthorne House Apartments at $19.1 million and $9.6 million, respectively, significantly down from issuance values of $34.0 million and $16.0 million, respectively. Given the performance and value decline, DBRS Morningstar applied a stressed LTV and a POD penalty in its analysis for this review, resulting in expected losses that was more than triple the pool average expected loss.

At issuance, DBRS Morningstar shadow rated the 32 Old Slip Fee loan (Prospectus ID#2, 7.8% of the pool) as investment grade. With this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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, and X-FG are 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 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.

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/North American CMBS Insight Model Version 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

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

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 (June 9, 2023) https://www.dbrsmorningstar.com/research/415687

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