Morningstar DBRS Downgrades Credit Ratings on Two Classes of COMM 2014-CCRE20 Commercial Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on the following two classes of Commercial Mortgage Pass-Through Certificates, Series 2014-CCRE20 issued by COMM 2014-CCRE20 Commercial Mortgage Trust:

-- Class X-C to CCC (sf) from B (high) (sf)
-- Class D to CCC (sf) from B (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- 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 PEZ at A (low) (sf)
-- Class E at C (sf)

Morningstar DBRS changed the trends on Classes X-B, C, and PEZ to Negative from Stable. All other trends are Stable, with the exception of Classes X-C, D, and E, which have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades and Negative trends reflect Morningstar DBRS’ increased loss projections for the pool, primarily driven by the largest loan in special servicing, Harwood Center (Prospectus ID#4, 6.1% of the pool), which has received an updated appraisal indicating further value deterioration since the last credit rating action. Additionally, all loans are scheduled to mature in 2024 with two loans, Jacksonville Medical Centers (Prospectus ID#54, 0.5% of the pool balance) and Rite Aid Woodhaven (Prospectus ID#61, 0.3% of the pool balance), exhibiting elevated refinance risk given the underlying collateral’s weak operating performance and/or exposure to a bankrupt tenant. Additional details of these loans are discussed below. As the pool continues to wind down, Morningstar DBRS looked to a recoverability analysis in its review. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average debt service coverage ratio (DSCR), which was slightly above 2.0 times (x) as of the most recent financial reporting available, thereby supporting the credit rating confirmations and Stable trends on the remaining classes.

As of the January 2024 remittance, 51 of the original 64 loans remain in the pool with a trust balance of $852.0 million, representing collateral reduction of 28.0% since issuance. Since the last review, the Crowne Plaza Houston Katy Freeway loan, which was previously in special servicing, was liquidated from the trust at a realized loss of approximately $24.0 million, generally in line with Morningstar DBRS’ expectation. To date, the trust has incurred a total loss of $56.7 million, which affected Classes F, G, and H. There are 25 loans that are fully defeased, representing 28.7% of the pool balance. Seven loans, representing 4.9% of the pool balance, are on the servicer’s watchlist, and two loans, representing 11.4% of the pool balance, are in special servicing. One of the specially serviced loans, Beverly Connection (Prospectus ID#7, 5.1% of the pool) is likely to be returned to the master servicer in the near term.

The largest specially serviced loan, Harwood Center, is secured by an office building in downtown Dallas. The loan transferred to special servicing in 2020 after the former largest tenant, Omnicom Group Inc., significantly reduced its footprint by almost 50.0% at the property as part of a lease extension to 2030. The loan was last paid through July 2020 and became real estate owned in November 2021. According to the servicer, the lender and property manager are working toward leasing up the property while completing a renovation plan that includes a new amenity floor and white boxing vacant space for future leases. As of January 2024, approximately $5.7 million is being held in reserve accounts and $14.0 million is being held in other property accounts. The April 2023 appraisal reported a value of $69.8 million, a decrease from the June 2022 value of $75.9 million and a steep decline from the issuance appraised value of $124.0 million. According to Reis, office properties in the Dallas central business district submarket reported a Q3 2023 vacancy rate of 32.4%, compared with the Q3 2022 vacancy rate of 30.3%. Given the collateral’s depressed value, sustained high vacancy rate, weak submarket fundamentals, and generally low investor appetite for this asset type, Morningstar DBRS analyzed this loan with a liquidation scenario, resulting in a loss severity above 60.0%.

Another loan of concern is Jacksonville Medical Centers, which is secured by two cross-collateralized, cross-defaulted medical office properties in Jacksonville, Florida. The loan is on the servicer’s watchlist for a low occupancy rate and DSCR, most recently reported at 48.9% and 0.4x as of YE2022, respectively. Likewise, cash flow has continued to fall, plummeting to $134,272 at YE2022 from $509,990 at issuance. Given the collateral’s low occupancy rate and the general challenges for office properties in today’s environment, Morningstar DBRS notes that the collateral’s as-is value has likely declined significantly. As such, the borrower may have difficulty refinancing the loan by maturity in November 2024, suggesting a transfer to special servicing may be forthcoming.

The Rite Aid Woodhaven loan is secured by a retail property in Woodhaven, Michigan. The property is leased to a single tenant, Rite Aid, through February 2029. Rite Aid filed for bankruptcy protection on October 15, 2023, with its restructuring plan focused on closing underperforming stores. To date, the company, which currently operates more than 1,700 locations across 17 states, has announced it will be shuttering more than 200 stores. Although the subject property does not appear to be included in the initial list of store closures, The Wall Street Journal reported in September 2023 that Rite Aid was negotiating with its creditors over a plan to close 400 to 500 stores. According to the most recent servicer commentary, Rite Aid submitted a request to have its lease at the property amended, which was approved, but the terms have yet to be disclosed. Given the uncertainty surrounding Rite Aid’s lease and the possibility of additional store closures in the future, refinance risk is elevated as the loan is scheduled to mature in October 2024.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023; https://dbrs.morningstar.com/research/416784).

Classes X-A, X-B, and X-C 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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down. In those cases, the Morningstar DBRS credit ratings are typically based on a recoverability analysis for the remaining loans. Additionally, sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0, (https://dbrs.morningstar.com/research/422859

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

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687

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

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

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

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

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