DBRS Morningstar Downgrades Credit Ratings on Seven Classes of COMM 2014-UBS3 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded its credit ratings on seven classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS3 issued by COMM 2014-UBS3 Mortgage Trust as follows:

-- Class B to A (sf) from AA (sf)
-- Class X-B to BBB (sf) from A (high) (sf)
-- Class C to BBB (low) (sf) from A (sf)
-- Class PEZ to BBB (low) (sf) from A (sf)
-- Class D to BB (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from BB (sf)
-- Class F to C (sf) from CCC (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class G at C (sf)

DBRS Morningstar changed the trends on Classes B, X-B, C, PEZ, and D to Negative from Stable. Classes E, F, and G have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. The trends on Classes A-3, A-4, A-M, and X-A are Stable.

The credit rating downgrades reflect DBRS Morningstar’s increased loss projections since the last credit rating action, primarily attributed to two loans in special servicing that have received updated appraisals, which have indicated value deterioration beyond DBRS Morningstar’s prior expectations. Additionally, as the deal is in wind-down, with all remaining loans scheduled to mature in the near term, DBRS Morningstar notes increased default risk for maturing loans exhibiting weak credit metrics. The Negative trends reflect the potential for additional defaults and future value decline.

As of the December 2023 remittance, 36 of the original 49 loans remain in the pool, representing a collateral reduction of 24.0% since issuance. Thirteen loans, representing 21.8% of the pool, have been fully defeased. As the transaction is in wind-down with the vast majority of loans scheduled to mature in the first half of 2024, DBRS Morningstar’s credit ratings are based on a recoverability analysis. Loss expectations are driven by two loans in special servicing, 1100 Superior Avenue (Prospectus ID#6, 5.7% of the pool) and Executive Center IV (Prospectus ID#45, 0.4% of the pool). DBRS Morningstar considered a liquidation scenario for both of these assets based on a stress to the most recent appraised values. In addition, four loans, representing an additional 30.6% of the pool, exhibit elevated levels of distress and thus are exposed to significant refinance risk as they near maturity.

1100 Superior Avenue is a Class B, 576,766-square-foot (sf) office property in downtown Cleveland, Ohio. The loan transferred to the special servicer in July 2021 for imminent monetary default following long-standing occupancy concerns and difficulties backfilling vacant space. As of the October 2023 rent roll, the subject was 54.2% occupied. The largest tenant is the James B Oswald Company (17.5% of the net rentable area (NRA), lease expiry in July 2025) with no remaining tenant making up more than 9% of the NRA. The asset became real estate owned in January 2023. The most recent appraisal, dated August 2023, valued the property at $16.7 million, down from the December 2022 appraised value of $26.0 million. Given the continued decline in value, the softening submarket, and the asset’s high vacancy, DBRS Morningstar anticipates a significant loss at disposition, representing nearly the full loan amount.

The State Farm Portfolio (Prospectus ID#2, 12.4% of the pool) is pari passu with the COMM 2014-UBS4 (rated by DBRS Morningstar), COMM 2014-UBS5 (rated by DBRS Morningstar), and MSBAM 2014-C16 transactions and is secured by a portfolio of 14 cross-collateralized, cross-defaulted office properties in 11 different states. The loan transferred to the special servicer in September 2023 but remains current on its debt service payments. Although DBRS Morningstar did not analyze this loan with a liquidation scenario, given that the current workout strategy is noted as full payoff, DBRS Morningstar remains cautious about the loan’s prospects of refinance given that the underlying assets are dark. At issuance, the properties were 100% occupied by State Farm Mutual Automobile Insurance Company (State Farm) with all but two of the leases running through 2028. While the leases remain in place and State Farm continues to make rent payments on all properties, it has physically vacated every property. The loan has an anticipated repayment date in April 2024, after which it is scheduled to hyperamortize until April 2029. Rental income is currently covering debt service with a reported YE2022 debt service coverage ratio of 2.06 times.

Recent servicer commentary indicates that ongoing discussions include potential partial defeasance, payoff of the loan, modification, or property releases. DBRS Morningstar has asked for further clarification on the noted workout strategies. Although the evidence of borrower cooperation and various workout strategies are promising, DBRS Morningstar considers the loan at increased risk of maturity default given the large exposure to office space in secondary markets and full vacancy of the underlying assets. Should this loan default, DBRS Morningstar expects that an updated appraisal will indicate significant value decline.

Other loans of concern not currently in special servicing include Equitable Plaza (Prospectus ID#3, 11.0% of the pool) and the Solo Cup loan (Prospectus ID#7, 5.9% of the pool). Equitable Plaza is secured by a 688,292-sf office property in the Park Mile submarket of Los Angeles. Occupancy has been in decline, dropping to 55.3% as of June 2023 from 67% at YE2021 and 82% at YE2020. As of the June 2023 rent roll, leases representing an additional 27.4% of the NRA are scheduled to expire by YE2024, posing risk for additional vacancy. The tenancy at the subject is quite granular, with no single tenant comprising more than 5.0% of the total NRA. Given the historical lack of leasing activity and concentrated rollover in the near to medium term, DBRS Morningstar notes an increased level of credit risk as the loan approaches maturity in June 2024.

The Solo Cup loan is secured by a 1.6 million-sf warehouse and distribution facility in University Park, Illinois, approximately 30 miles south of the Chicago central business district. The subject was formerly leased to sole tenant Sweetheart Cup Company, whose lease expired in September 2023. The tenant elected not to exercise its extension option and reportedly vacated the property, although the December 2023 servicer commentary noted the borrower is in negotiations with the tenant to renew the lease on different terms. While the property is easily demisable and in a core Midwest market, the combination of the space being 100% vacant with an upcoming February 2024 maturity puts the loan at increased risk of default.

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 and X-B 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.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down, with only a few loans remaining. In those cases, the DBRS Morningstar credit ratings are typically based on a recoverability analysis for the remaining loans.

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.

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 (November 3, 2023)/North American CMBS Insight Model version 1.2.0.0 (https://www.dbrsmorningstar.com/research/422859)

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://www.dbrsmorningstar.com/research/425261)

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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

-- Legal Criteria for U.S. Structured Finance (December 7, 2023; https://www.dbrsmorningstar.com/research/425081)

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].