DBRS Morningstar Downgrades One Class and Changes Trends on Two Classes of COMM 2015-CCRE23 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the rating on one class of the Commercial Mortgage Pass-Through Certificates, Series 2015-CCRE23 issued by COMM 2015-CCRE23 Mortgage Trust as follows:

-- Class F to C (sf) from CCC (sf)

DBRS Morningstar also confirmed the ratings on the remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class X-C at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at B (high) (sf)
-- Class X-D at B (sf)

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

The downgrade and Negative trends are reflective of the DBRS Morningstar’s loss projections for the loans in special servicing. The most significant contributors are the Holiday Inn Manhattan View (Prospectus ID#19; 1.7% of the pool balance) and the DoubleTree Norwalk (Prospectus ID #20; 1.6% of the pool balance) loans. In addition, DBRS Morningstar notes additional downward pressure on the classes carrying Negative trends because of increased risks for the Sherman Plaza loan (Prospectus ID#6; 4.2% of the pool balance), as further discussed below.

At the last review, DBRS Morningstar confirmed the CCC (sf) rating on Class F, based on the liquidated loss projections for the four specially serviced loans (currently 5.5% of the pool balance) that, based on the most recent valuations obtained by the special servicer at that time, were expected to be contained to the unrated Class G, which has a current balance of $38.4 million. However, updated appraisals for some loans obtained since that review have shown value declines, pushing DBRS Morningstar’s liquidated loss projections into Class F, supporting the downgrade with this review. The rating confirmations and Stable trends reflect the otherwise stable performance of the underlying loans, as well as an additional $44.6 million in defeasance since the last rating action in November 2022.

As of the August 2023 remittance, 74 of the original 84 loans remain in the pool, with a trust balance of $1.1 billion, representing a collateral reduction of 23.0% since issuance. The pool benefits from 22 loans that are fully defeased, representing 37.0% of the pool balance. As noted above, four loans are in special servicing and 15 loans are on the servicer’s watchlist, representing 31.4% of the pool balance. The watchlisted loans are generally being monitored for performance issues related to declining cash flows or occupancy declines and rollover.

The pool is exposed to a relatively high concentration of loans backed by office properties that represent 26.7% of the transaction. Three office loans in the pool reported a debt service coverage ratio (DSCR) below 1.0 times (x) as of the YE2022 reporting, including one top 10 loan in Sherman Plaza. The collateral property is a 267,648 square foot (sf) Class A office complex in Van Nuys, California. The loan has been on the servicer’s watchlist since December 2020 as a result of a low DSCR and low occupancy following the departure of the previously largest tenants, Brightwood College (16.2% of the net rentable area (NRA)) and U.S. GSA (10.0% of the NRA) in 2019. Occupancy has yet to recover and was most recently reported at 59.2% as of the March 2023 rent roll, in line with the past few years. Although the loan was structured with a provision allowing for a cash sweep in the event Brightwood College did not renew or vacated the property, the in-place cash flows are below breakeven and there is no excess cash to trap. The YE2022 DSCR was reported at 0.62x, up slightly from 0.57x at YE2021, but ultimately well below the DBRS Morningstar DSCR of 1.25x. The largest tenants as of March 2023 include Loan Mart (8.7% of the NRA, lease expiry in June 2024), State of California Employment Development Department (8.1% of the NRA, lease expiry in June 2027), and Interviewing Service of America (7.0% of the NRA, lease expiry in January 2025). Rollover risk is relatively moderate with leases representing approximately 10.7% of the NRA rolling within the next year; however, this figure is more significant given the already low in-place occupancy rate.

The servicer commentary notes that the borrower has cited significant difficulty garnering interest in the vacant space given deteriorating market conditions and the general uncertainty with regard to demand for office space in the current environment. According to Reis, the San Fernando Valley-Central reported a Q2 2023 vacancy rate of 17.1%, compared with the 17.9% vacancy rate for Q2 2022. The loan has remained current throughout the period of low in-place cash flows, but the sponsor’s commitment will likely become weaker as the loan approaches the 2025 maturity date and a significant out-of-pocket investment will likely be required to secure a replacement loan, barring significant changes in the property finances. Given these circumstances, this and other similarly challenged office loans in the pool were analyzed with a stressed scenario to increase the expected losses (ELs). For those office loans subject to a stressed scenario, the resulting EL was approximately 1.5x the pool average EL.

The largest loan in special servicing, Holiday Inn Manhattan View, is secured by the leasehold interest in a 136-key limited-service hotel in Long Island City, New York. The loan transferred to special servicing in February 2020 for a default at loan maturity in January 2020. As a result of the Coronavirus Diseases (COVID-19) pandemic, the property was closed in March 2020 and has never reopened. The hotel lost its affiliation with Holiday Inn in June 2021, which triggered full recourse provisions. Since then, a foreclosure procedure was initiated, and a receiver was appointed in August 2022. According to the latest servicer’s commentary, a motion for summary judgement was granted by court in February 2023, expediting the foreclosure process and leading to the note’s auction. Negotiation between the lender and a potential buyer for the note are currently in progress. The hotel was re-appraised in November 2022 for $8.5 million, down from the July 2021 appraised value of $11.5 million and the $29.5 million appraised value at issuance. Based on this value and projected expenses at liquidation, DBRS Morningstar analyzed the loan with a liquidation scenario that results in a loss severity in excess of 100%.

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-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 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 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 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.

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 credit ratings are monitored.

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/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

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 analyzes 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].