DBRS Morningstar Confirms Credit Ratings on All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2015-C24

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-C24 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C24 as follows:

-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 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 (sf)
-- Class D at BBB (low) (sf)
-- Class E at B (high) (sf)
-- Class F at B (low) (sf)

All trends are Stable. The credit rating confirmations reflect the overall stable performance of the transaction as evidenced by the pool’s healthy weighted-average (WA) debt service coverage ratio (DSCR) of 1.83 times (x) based on the most recent year-end financials available. The pool has a loss of $3.3 million to date, which is well contained in the sizable nonrated Class G.

As of the October 2023 remittance, 64 of the original 74 loans remain in the trust, with an aggregate balance of $802.7 million, representing a collateral reduction of 14.2% since issuance. The pool benefits from 11 loans that are fully defeased, representing 10.8% of the pool. Eleven loans, representing 25.4% of the pool, are on the servicer’s watchlist and are primarily monitored for deferred maintenance, low DSCR, and/or occupancy concerns. Since DBRS Morningstar’s last review, Aloft – Green Bay, WI (Prospectus ID#27) was liquidated from the trust at a loss of approximately $594,000, below DBRS Morningstar’s projected loss estimate of $2.0 million. In addition, Holiday Inn Express – Medford, OR (Prospectus ID#57), which was previously in special servicing, was paid off in full in November 2022, ahead of its May 2025 scheduled maturity date.

Excluding defeasance, the transaction is most concentrated by retail, multifamily, and office properties, which represent 27.1%, 19.8%, and 19.5% of the current pool balance, respectively. In general, the office sector has been challenged, given the low investor appetite for that property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. Office loans and any other loans that have exhibited increased credit risk were analyzed with stressed loan-to-value ratios (LTVs) and/or elevated probability of default penalties with this review. The resulting expected losses for these loans averaged almost two times higher than the respective baseline expected loss.

The largest loan in the pool, 535-545 Fifth Avenue (Prospectus ID#1, 13.7% of the pool balance), is secured by a mixed-use property comprising 415,440 square feet (sf) of office space and 91,247 sf of retail space in midtown Manhattan. Occupancy at the subject has been declining since 2021 before hitting a low of 65.3% at YE2022. This was primarily driven by the departure of the former largest tenant, Knotel (formerly occupied 7.5% of the net rentable area (NRA)), which vacated the subject after filing for Chapter 11 bankruptcy in early 2021. However, the borrower was able to execute new leases including Best Buy, which is currently the largest tenant representing 7.2% of the NRA on a lease through March 2031. In addition, 12 leases totaling 14.4% of the NRA were signed in the last 12 months. As a result, the August 2023 rent roll reported an improved occupancy rate of 87.3%. As per Reis, office properties in the Grand Central submarket reported a vacancy rate of 12.2% as of Q2 2023, compared with 11.7% in Q2 2022.

According to the financials for the trailing six month (T-6) ended June 30, 2023, period, the annualized DSCR was reported at 1.55x, compared with the YE2022 and YE2021 DSCRs of 1.56x and 1.71x, respectively. The decline in performance and volatile occupancy in the last few years are noteworthy given the challenged office landscape. However, mitigating factors include the recent leasing momentum, improved occupancy levels, and the loan’s issuance LTV of 50.0%, which provides cushion against potential value declines. For this review, DBRS Morningstar took a conservative approach and applied a considerably stressed LTV in the analysis, which results in an expected loss that was four times more than the initial loan-level expected loss but continues to be well below the pool average.

Another office loan is the 626 Wilshire Boulevard (Prospectus ID#5, 2.8% of the current pool balance), which is secured by an 11-story Class A/B office building in the central business district of Los Angeles with a maturity date in July 2025. As of the August 2023 rent roll, the property was 75.7% occupied, a decline from the YE2022 occupancy rate of 82.0%. In addition, there is considerable tenant rollover of nearly 30.0% of the net rentable area with leases scheduled to expire during the remaining term of the loan, including four of the five largest tenants. The second-largest tenant, Environmental Science Associates (7.3% of the NRA), intends to vacate upon its lease expiry in May 2024, which would result in occupancy dropping to about 68.0%. Based on an online posting, JLL is currently advertising approximately 13.5% of NRA as available for lease.

As per Reis, office properties in the downtown submarket reported a Q2 2023 vacancy rate of 17.2%, compared with the Q2 2022 vacancy rate of 15.8%. The average asking rental rate is $44.50 per square foot (psf), compared with the property’s in-place average rental rate of $37.28 psf. According to the T-6 June 30, 2023, financials, the loan reported an annualized DSCR of 1.63x, compared with the YE2022 and YE2021 figures of 1.75x and 1.54x, respectively. Despite the healthy financial performance, the overall credit risk profile of the loan has increased given the subject’s high rollover risk, below in-place rental rates, and soft submarket. As such, DBRS Morningstar analyzed this loan with a stressed probability of default to increase the expected loss for this review.

ENVIRONMENTAL, SOCIAL, AND 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
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Tel. +1 416 593-5577

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 v 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 (September 22, 2023), https://www.dbrsmorningstar.com/research/420982

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

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].