Morningstar DBRS Downgrades Credit Ratings on Six Classes of COMM 2014-UBS2 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS2 issued by COMM 2014-UBS2 Mortgage Trust as follows:

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

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

-- Class A-5 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class F at C (sf)

Morningstar DBRS changed the trends on Classes A-M, X-A, B, C and PEZ to Negative from Stable. Classes X-B, D, E and F have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. The trend on Class A-5 is Stable.

The credit rating downgrades reflect the loss expectations for the specially serviced loans that represent 51.8% of the current pool balance. The concentration of specially serviced loans has increased from 5.0% at February 2023. While Morningstar DBRS is not projecting a loss for the largest specially serviced loan, Excelsior Crossings (Prospectus ID#3, 17.8% of the pool), three of the specially serviced loans, One North State Street (Prospectus ID#6, 13.7% of the pool), Canyon Crossing (Prospectus ID#8, 11.3% of the pool), and 300 East 23rd Street (Prospectus ID#25, 2.9% of the pool), reported value declines from issuance, which suggest losses will likely be incurred at resolution. The remaining specially serviced loans have not reported updated appraisals to date, but Morningstar DBRS expects those values have fallen, as well, considering the depressed performance for each.

By property type, the pool is concentrated by retail and office properties, representing 25.0% and 22.4% of the pool, respectively. There are 15 non-specially serviced loans remaining in the pool. Of these, six (10.1% of the pool) are fully defeased and nine, representing 38.1% of the pool balance, are on the servicer’s watchlist for upcoming maturity. These loans are generally performing well, with a weighted-average (WA) debt service coverage ratio (DSCR) of 1.52x and debt yield of 11.5%, based on the most recent year-end financials.

For this review, Morningstar DBRS analyzed five of the six specially serviced loans with liquidation scenarios at a total loss of approximately $61.0 million, resulting in a complete principal write down of Classes E, F and G, and a marginal principal write down of Class D, supporting the credit rating downgrades on those rated certificates to CCC (sf) or C (sf). To date, the trust has incurred a total loss of $27.7 million, all contained to the non-rated Class G. The remaining downgrades reflect the significant credit erosion to the transaction as the pool winds down with the remaining loans scheduled to mature in the next couple of months.

Just over half of the liquidated losses projected by Morningstar DBRS are associated with the One North State Street loan (Prospectus ID#6; 6.0% of the pool), which is secured by a 170,507-square foot (sf) retail vertical subdivision of a 713,423-sf, 16-story, mixed-use office and retail building in Chicago. Prior to being transferred to special servicing for imminent default in June 2023, the loan had -previously been on the servicer’s watchlist as the largest tenant, Burlington Coat Factory (Burlington; 35.2% of the net rentable area (NRA)), did not renew its lease ahead of its February 2023 lease expiration. The borrower was able to extend Burlington’s lease for a one-year term through March 2024 in exchange for a significant reduction in rent equal to 10% of the tenant’s gross sales, which has resulted in a below break-even cash flow. The second-largest tenant, T.J. Maxx, (41.1% of the NRA) has a lease expiring in July 2024. Although that tenant’s plans are unknown, a visit to the store by a Morningstar DBRS analyst in late January 2024 showed the tenant is not utilizing approximately 20% of the space. Shelves and racks were very well stocked in the utilized space, but foot traffic was relatively light for a Friday afternoon.

The last monthly payment was made in August 2023 and the special servicer is actively pursuing receivership and foreclosure. According to the August 2023 appraisal, the property was valued at $25.0 million, a steep decline from the issuance appraised value of $101.0 million, reflecting a total exposure loan-to-value (LTV) ratio of over 200%. Morningstar DBRS liquidated the loan based on a haircut to that value, resulting in an implied loss approaching $34.0 million, or a severity of nearly 70.0%

Morningstar DBRS also liquidated the Canyon Crossing and 300 East 23rd Street loans with significant loss projections cumulatively totaling nearly $20.0 million. The Canyon Crossing loan is secured by a retail shopping center in Riverside, California, and has been real estate owned) since September 2019. While there have been moderate improvements in value year over year since the trust took title, the April 2023 appraisal valued the property at $50.2 million, still 20.3% below the issuance value of $63.0 million. In addition, over $9.0 million has been advanced, resulting in a LTV ratio approaching 100% based on the total exposure. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the appraised value, resulting in an implied loss over $10.0 million, or a severity of roughly 25.0%.

The 300 East 23rd Street loan is secured by a 11,000-sf, ground-floor, single-tenant retail space of a condo in Manhattan. The space was previously occupied by Duane Reade, a pharmaceutical chain; however, the tenant had a lease expiration in March 2023 and did not renew, leaving the space dark. The loan subsequently went into default and was subsequently transferred to special servicing in May 2023. The servicer is currently dual tracking foreclosure and a deed-in-lieu. According to the August 2023 appraisal, the property was valued at $3.0 million, a steep decline from the issuance appraised value of $16.6 million, reflecting a LTV ratio of nearly 370.0% based on the loans total exposure. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the appraised value, resulting in an implied loss nearly $10.0 million, or a severity approaching 90.0%.

The largest loan in special servicing, Excelsior Crossings, is secured by two Class A office buildings in Hopkins, Minnesota, approximately 10 miles from the Minneapolis CBD. The previous sole tenant, Cargill, terminated its lease in March 2018. Although the borrower was able to collect $9.5 million of funds from a cash flow sweep and termination fees, and secured U.S. Bank (59.0% of the NRA, expiring September 2030) and Digi International Inc. (10.8% of the NRA, lease expiring January 2032) as replacement tenants for some of the vacant space, the loan transferred to special servicing in December 2020 for imminent monetary default. The borrower subsequently entered into a purchase and sale agreement with Bridge Investment Group, LLC, which included a large equity infusion of roughly $19.0 million to bring the loan current and to fund an all-purpose reserve and a debt service reserve. The loan was returned to the master servicer as a corrected loan in May 2022; however, it was recently returned to the special servicing in December 2023 for imminent default on the scheduled maturity in January 2024.

While net cash flow (NCF) fell precipitously following Cargill’s departure, the loan most recently reported a NCF of $7.0 million and DSCR of 1.26x, as the borrower has re-leased the property to 98.0% as of December 2023, most recently signing Sovos Compliance LLC (6.9% of the NRA, lease expiring March 2030) in late 2023. The sale price of the property in February 2022 was $82.5 million, a moderate decline from the December 2021 appraised value of $92.0 million and significant decline from the issuance value of $141.0 million. Based on the 2022 sale value, the loan reflects moderate financing with an LTV ratio of 77.3%; however, given the location and current interest rate environment, Morningstar DBRS believes an appraisal obtained in the near term could show a value decline since that time, further impairing the borrower’s efforts to obtain a replacement loan. The borrower has approximately $1.7 million of reserves remaining to further stabilize the property. Given the reserves on hand, the recent equity investment, and the relatively healthy in-place DSCR, it seems likely the sponsor and the special servicer will come to terms on a loan modification to address the maturity default. Given the general stress on suburban office properties and the high in-place LTV that could be higher, a stressed analysis was considered by Morningstar DBRS for this loan, which suggested an implied loss of approaching 25% would be realized in a 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 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 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 the early 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
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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].