DBRS Morningstar Confirms All Classes of Banc of America Merrill Lynch Commercial Mortgage Trust 2015-UBS7

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by Banc of America Merrill Lynch Commercial Mortgage Trust 2015-UBS7:

-- 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 (low) (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (low) (sf)
-- Class D at BB (high) (sf)
-- Class X-E at B (sf)
-- Class E at B (low) (sf)
-- Class F at C (sf)
-- Class G at C (sf)

All trends are Stable.

The ratings confirmation reflects the overall healthy financial performance of the pool, as exhibited by the weighted-average debt service coverage ratio (DSCR) as of the most recent reporting, which was above 2.0 times (x). The C (sf) ratings on Classes F and G are reflective of the low credit support given the significant erosion of the unrated first loss piece, the Class H certificate, which had a balance of $21.8 million at issuance and as of the July 2023 remittance, has been reduced to a balance of $2.3 million due to realized losses incurred to date. The most notable loss was realized with the liquidation of the WPC Department Store Portfolio loan (Prospectus ID#12) in August 2022 with a loss of $19.5 million. The defeasance adjusted credit support for the Class F and G certificates is now 1.7% and 0.4%, respectively.

As of the July 2023 remittance, 38 of the original 42 loans remain in the pool, representing a collateral reduction of 20.0% since issuance. There are six loans, representing 4.8% of the pool, that are fully defeased. One loan is in special servicing and six loans are on the servicer’s watchlist, representing 0.9% and 29.6% of the pool balance, respectively. The Aviare Place Apartments (Prospectus ID#28; 0.9% of the pool) loan is a pari passu loan, with the other piece of the whole loan held in the Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23 transaction (rated by DBRS Morningstar). The collateral is a multifamily property in Midland, Texas, and the loan transferred to special servicing in December 2021. The most recent appraisal on file is dated February 2022, showing an as-is value of $19.1 million, down from the issuance value of $34.0 million. Based on this updated valuation, a stressed scenario was analyzed for this review, with the resulting expected loss that was more than triple the pool average.

The pool is concentrated by property type with office loans representing 27.6% of the pool balance, while retail and hotel loans represent 19.7% and 18.0% of the pool balance, respectively. 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 performance declines from issuance or otherwise exhibiting increased risks from issuance were analyzed with stressed scenarios to increase expected losses as applicable. As a result of this approach, loans backed by office properties exhibited a weighted-average expected loss that was nearly double the pool average.

The third-largest office loan in the pool is 651 Brannan Street (Prospectus ID#6; 5.8% of the pool), collateralized by a low-rise office property in San Francisco. The property is primarily occupied by Pinterest, with 89.0% of the net rentable area (NRA) on a lease that runs through May 2029. Pinterest has recently been reported to be subleasing other leased space in the San Francisco area, but the subject property serves as the company’s headquarters and appears to continue as the firm’s core business footprint. In addition to the longer term lease, the loan benefits from the low going-in loan-to-value ratio (LTV) at issuance of 46.0%, with the amortization since suggesting an LTV of 36.1% on the issuance value. Although the current challenges for office properties, particularly within San Francisco, likely mean the as-is value has declined from issuance, there is significant cushion to insulate the trust from loss should a default occur in the term or at maturity.

The pool’s office exposure is all in the top 10, with three loans backed by office properties in New York, Boston, and San Francisco. The largest of these loans, 261 Fifth Avenue (Prospectus ID#2; 11.6% of the pool), is secured by a Class B office building in Midtown Manhattan. The loan is on the servicer’s watchlist for occupancy declines from issuance, but the most recently reported figures show signs of improvement with the occupancy rate improving to 85.0% as of March 2023, up from a low of approximately 78.0% in late 2022. The property was fully occupied at closing in 2015 but has consistently hovered around the current occupancy rate for several years. Cash flows have been depressed from issuance, with the YE2022 DSCR at 1.24x, but the Q1 2023 figures showed improvement to a coverage of 1.42x, likely a factor of leasing activity in 2022. Given the cash flow declines, a stressed LTV was analyzed for this review to increase the expected loss.

The Mall of New Hampshire loan (Prospectus ID#5; 8.3% of the pool) is also a pari passu structure, with the other portions of debt held within the CSAIL 2015-C3 Commercial Mortgage Trust transaction (rated by DBRS Morningstar). The loan is secured by approximately 406,000 square feet (sf) of in-line space in an 812,000-sf enclosed regional mall in Manchester, New Hampshire. The mall, which is jointly owned by Simon Property Group and the Canadian Pension Plan Investment Board, is anchored by Macy’s, JCPenney, and Dick’s Sporting Goods—none of which serve as collateral for the loan. Because of the business interruptions amid the Coronavirus Disease (COVID-19) pandemic, the loan transferred to special servicing, and a cash trap was activated in December 2020. The cash trap remains active as of May 2023 and, according to the May 2023 reserve report, $1.4 million of lockbox receipts have been collected, in addition to $213,000 outstanding in a leasing reserve. The loan returned to the master servicer in May 2021 after a forbearance was executed to defer interest payments from May 2020 through December 2020.

As of March 2023, the property was approximately 81.0% occupied. The largest collateral tenants include Best Buy, Old Navy, and Ulta, collectively representing more than 15.0% of the net rentable area (NRA). According to the most recent information on file with DBRS Morningstar, Old Navy’s lease expired in January 2022; the mall website shows the store remains open and a leasing update has been requested from the servicer. According to the December 2022 tenant sales report, the mall reported in-line sales (excluding Apple) of $437 per square foot (psf), which are up from the in-line sale of $396 psf as of August 2021. As of the Q1 2023 financials, the loan reported an annualized net cash flow of $10.6 million, equating to a DSCR of 1.70x, compared with the YE2022 DSCR of 1.80x, and the DBRS Morningstar DSCR of 2.30x. Although the loan’s in-place coverage remains healthy, cash flow continues to lag DBRS Morningstar’s expectations. To account for these increased risks, a stressed scenario was analyzed that resulted in an expected loss more than double 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 https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-A, X-B, 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 credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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.

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

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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