Morningstar DBRS Downgrades Credit Ratings on Nine Classes of COMM 2014-UBS4 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on nine classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS4 issued by COMM 2014-UBS4 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 (low) (sf) from BBB (low) (sf)
-- Class X-C to CCC (sf) from B (high) (sf)
-- Class E to CCC (sf) from B (sf)
-- Class X-D to C (sf) from B (sf)
-- Class F to C (sf) from B (low) (sf)

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

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)

Morningstar DBRS changed the trends on Classes B, X-B, C, PEZ, and D to Negative from Stable. Classes X-C, E, X-D and F have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. The trends on Classes A-4, A-5, A-M and X-A are Stable. Morningstar DBRS also discontinued the rating on Class A-SB as the certificate has repaid in full.

The credit rating downgrades reflect increased loss projections since the last credit rating actions, primarily attributed to the 597 Fifth Avenue loan (Prospectus ID#2, 10.8% of the pool), which received an updated appraisal indicating value deterioration beyond Morningstar DBRS’ prior expectations. Additionally, as the deal is in wind-down, with the majority of loans scheduled to mature before the end of 2024, Morningstar DBRS notes increased default risk for maturing loans exhibiting weak credit metrics, supporting the Negative trends.

According to the January 2024 reporting, 77 of the original 91 loans remain in the pool, representing a collateral reduction of 24.5% since issuance. Since last year, three loans have repaid from the trust, while defeasance increased to 35 loans, representing 20.5% of the pool. As the transaction is in wind-down with the vast majority of loans scheduled to mature prior to the end of 2024, the analysis for this review generally focused the recoverability prospects for the remaining pool. As noted, Morningstar DBRS’ largest loss expectation is associated with the 597 Fifth Avenue loan; however, there are six other loans in special servicing, cumulatively representing 31.7% of the pool. Three of these loans are real estate-owned assets, which Morningstar DBRS maintained loss projections for based on stressed scenarios to the updated 2023 values. For this review, Morningstar DBRS analyzed four of the specially serviced loans with liquidation scenarios at a total loss of nearly $66.0 million, resulting in a complete principal write down of Class G and a partial principal write down of over 80% for Class F. In addition, two other specially serviced loans and a concentration of loans on the servicer’s watchlist are exhibiting elevated levels of distress and thus are exposed to significant refinance risk as they near maturity.

The 597 Fifth Avenue loan is secured by two adjacent mixed-use properties in Manhattan’s Midtown neighborhood. The property consists of 80,032 square feet (sf) of Class B office and ground-floor retail space. The loan transferred to the special servicer in October 2020, at which time a new leasing and management firm was appointed, and a consent agreement was approved allowing for the use of reserves to fund debt service payments. The loan was subsequently brought current and paid through to October 2022, when the reserve account was depleted. While the borrower had proposed a significant discounted payoff, the offer was ultimately rejected. A receiver has since been appointed as the special servicer actively pursues foreclosure.

Cash flows at the property have been in flux since Sephora vacated the ground-floor retail space in 2017. The space was later taken by Lululemon on a short-term basis; however, Lululemon’s departure in 2020 (formerly 10.0% of net rentable area (NRA)) caused significant cash flow declines, given that 80% of the asset’s total base rent had historically been generated by the retail tenant. Club Monaco has since taken over the space, originally signing a one-year lease that expired in August 2023 followed by a short-term extension through January 2024. The servicer has indicated that another extension is currently being negotiated. Based on the former lease agreement, Club Monaco (14.6% of the NRA) was paying approximately $450 per square foot (psf), far below the submarket average reported above $2,000 psf for retail properties in the Upper Fifth Avenue corridor.

According to the November 2023 appraisal, the property had an as-is value of $84.3 million, a steep decline from the issuance appraised value of $180.0 million, reflecting a loan-to-value (LTV) ratio of over 140% based on the total exposure. Per the appraisal, the property had a leased rate of 43.9%, falling from an occupancy of 49.0% in March 2023 and 71.4% in June 2022. Cash flow at the property has declined consistently alongside occupancy since issuance, with the March 2023 reporting reflecting a negative figure, falling from the annualized June 2022 figure of $3.4 million and issuance figure and $7.4 million. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the appraised value, resulting in an implied loss approaching $49.0 million, or a severity of nearly 50.0%.

The State Farm Portfolio (Prospectus ID#1, 13.2% of the pool) is pari passu with the COMM 2014-UBS3 (rated by Morningstar DBRS), COMM 2014-UBS5 (rated by Morningstar DBRS), 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 Morningstar DBRS did not analyze this loan with a liquidation scenario, given that the current workout strategy is noted as full payoff, Morningstar DBRS 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 DSCR of 2.06x.

Recent servicer commentary indicates that ongoing discussions include potential partial defeasance, payoff of the loan, modification, or property releases. Morningstar DBRS has asked for further clarification on the noted workout strategies. Although the evidence of borrower cooperation and various workout strategies are promising, Morningstar DBRS 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, Morningstar DBRS expects that an updated appraisal will indicate significant value decline.

Another loan of concern is 30 Knightsbridge (Prospectus ID#4, 5.3% of the pool), secured by four interconnected, three-story office buildings, totaling 686,316 sf, located in Piscataway, New Jersey, roughly 40 miles southwest of Manhattan. The loan recently transferred to special servicing in December 2023 for imminent default. While the loan has historically performed well with occupancy and coverage reported at 94% and 1.44x, respectively, as of YE2022, the Q3 2023 servicer reporting indicates occupancy has fallen to 73.0% despite coverage increasing to 1.86x. While the borrower did recently sign Infinity Biologix LLC (24.7% of NRA) to a long-term lease through April 2032, the second-largest tenant Qualcare Alliance Networks (20.8% of NRA) recently had a lease expiration in July 2023, while the third- and fourth-largest tenants, AECOM Technology Corporation (10.4% of NRA) and CSC TKR, LLC (9.2% of NRA) recently had lease expirations in September 2023. Based on the LoopNet findings, there does not appear to be a significant amount of space listed as available, with the only one small suite listed as of November 2023, which would indicate the subject property is significantly outperforming its submarket of Piscataway/South Plainfield that reported a vacancy rate of 22.4% as of Q4 2023. Given the loan’s transfer to special servicing and the concentration of tenant rollover, a stressed scenario was considered for the loan that implied a loss severity of approaching 35% would be realized in a near- to moderate-term liquidation.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

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 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.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down with majority of the loans in the pool maturing in 2024. In these cases, the DBRS Morningstar 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. Morningstar DBRS’ outlooks and credit ratings are monitored.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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].