Morningstar DBRS Downgrades Two Classes and Changes Trend on JPMBB Commercial Mortgage Securities Trust 2015-C32

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C32 issued by JPMBB Commercial Mortgage Securities Trust 2015-C32 as follows:

-- Class X-B to A (sf) from AA (low) (sf)
-- Class B to A (low) (sf) from A (high) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class C at CCC (sf)
-- Class EC at CCC (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)

The trend on classes A-S, B, X-A, and X-B were changed to Negative from Stable with this review. Classes C, D, E, F, G, and EC have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All other classes have Stable trends.

The credit rating downgrades on Classes B and X-B are primarily driven by increased loss projections from the loans in special servicing, as a result of declines in appraised values for the underlying assets, further discussed below. Morningstar DBRS continues to project significant losses related to specially serviced loans, which represent 30.7% of the pool, as reflected by the distressed ratings assigned to Classes C, D, E, F, G, and EC. While Morningstar DBRS does not currently expect losses will exceed the class C bonds, the vast majority of remaining loans in the pool are scheduled to mature until 2025, and a number of office-backed loans identified by Morningstar DBRS could pose possible refinance risk. Additionally, Morningstar DBRS’ ratings are constrained by the expectation of accruing interest shortfalls prior to repayment, which has also contributed to Morningstar DBRS’ downgrades and trend changes. Interest shortfalls currently total $14.9 million, up from a total interest shortfall amount of $9.6 million at the time of the last rating action. Unpaid interest continues to accrue month over month, driven by advances, special servicing fees and appraisal subordinate entitlement reduction (ASER) from the loans in special servicing. Morningstar DBRS has minimal tolerance for unpaid interest to high investment-grade rated bonds, limited to one to two remittance cycles for the AA (sf) and A (sf) credit rating categories.

As of the January 2024 remittance, 73 loans of the original 89 remain outstanding with a pool balance of $726.8 million, representing a collateral reduction of 36.7% since issuance. Of the remaining loans, six loans, representing 5.7% of the pool balance, have fully defeased. Five loans are in special servicing, totaling 30.7% of the pool balance, including the top three loans.

The largest loan in the pool and in special servicing, Civic Opera Building (Prospectus ID#2, 9.4% of the pool), is secured by the borrower’s fee-simple interest in a 915,162-square-foot office property in Chicago’s West Loop District and is pari passu with a companion note in the JPMBB 2015-C31 transaction, which is also rated by DBRS Morningstar. The loan transferred to special servicing in June 2020 following the borrower’s request for forbearance relief as a result of the COVID-19 pandemic. The loan has been delinquent since May 2021, and a receiver has been appointed. According to servicer commentary from January 2024, the lender is continuing with the foreclosure process.

Occupancy continues to decline and remains well below the 92.4% at issuance. According to the September 2023 rent roll, the property was 56.8% occupied, as compared with the September 2022 figure of 63.7% and the YE2021 figure of 69.4%. The largest tenants are Bnd Civic Wacker, LLC (6.8% of the net rental area (NRA), expiry in November 2033); Teamworking COB LLC (5.2% of the NRA, lease expiry in April 2028); Natural Resources (2.8% of the NRA, expiry in March 2038); and Perficient, Inc. (2.4% of the NRA, expiry in June 2030). There is minimal upcoming rollover risk, with leases representing 5.7% of the NRA scheduled to expire by YE2024. The most recent appraisal obtained by the special servicer, dated April 2023, valued the property at $128.3 million, compared with the September 2022 value of $159.4 million, and the February 2021 figure of $165.0 million. The April 2024 appraised value represents a 42.6% decline from the appraised value of $220.0 million at issuance. Morningstar DBRS’ analysis included a liquidation scenario based on a stress to the April 2023 appraised value to reflect the continued declining occupancy, upcoming rollover, and weak submarket fundamentals, resulting in an increased projected loss severity approaching 70% with this review.

The second-largest loan in special servicing is Hilton Suites Chicago Magnificent Mile (Prospectus ID#1, 9.1% of the pool), which is secured by a 345-key full-service hotel in the Magnificent Mile district of Chicago. The loan transferred to special servicing in May 2020, and the asset became real-estate owned (REO) in April 2023. According to the January 2024 servicer commentary, the property is currently not being marketed for sale. The subject’s recovery since the COVID-19 pandemic, has been slow, consistent with the Chicago hotel market. The annualized net cash flow (NCF) based on reporting for the trailing nine months ended September 2023 was $5.3 million, compared with $4.4 million at YE2019 and a Morningstar DBRS NCF of $6.8 million at issuance. According to the October 2023 STR report, the property's occupancy, average daily rate (ADR), and revenue per available room (RevPAR) were 67.1% $210.18 and $140.95, respectively, for the trailing 12 month (TTM) period, with a RevPAR penetration of 116.3%, indicating the asset is outperforming its competitive set. A March 2023 appraisal valued the asset at $63.1 million representing a 43.9% reduction in value since issuance and a $5.0 million decline from the previous appraisal in April 2022. Given oversaturation concerns with the Chicago hotel market, as well as additional value decline signaled by the March 2023, appraisal, Morningstar DBRS’ liquidation scenario included a stress to the most recent appraised value, resulting in a projected loss severity approaching 45%.

The third-largest loan in special servicing is secured by the fee-simple interest in Palmer House Retail Shops (Prospectus ID#3, 7.9% of the pool). The collateral consists of 134,536 square feet (sf) of retail (40.2% of NRA), office (10.7% of NRA), and parking space (49.1% of NRA) as part of the Palmer House Hotel in Chicago (noncollateral). The loan transferred to special servicing in July 2020 following operating difficulties caused by the COVID-19 pandemic and has been delinquent to date. The asset became REO in September 2023. As of the October 2023 rent roll, the property reported an occupancy of 47.1% for the retail and office portion, compared with 54.5% in June 2022, and 90.1% for the same portion at issuance. Each of the retail tenants currently appears to be paying rents based on its gross sales. In addition, the former parking operator, ABM Parking Services (49.1% of NRA, original lease expiry in July 2025), exercised a termination option in July 2020 and vacated the property. While the provided rent roll does not report a new operator, the space appears to have been taken over by SP Plus Parking. Terms of the new lease are not clear. Occupancy and operating performance concerns have persisted since the loan’s transfer to special servicing, with the YE2022 financials reporting an NCF of $1.1 million compared with the Morningstar DBRS issuance NCF of $4.5 million. No updated appraisal has been received since the last rating action. The July 2022 appraisal valued the collateral at $36.9 million, representing a 60.2% decline in value when compared with the $92.6 million valuation at issuance. With this review, Morningstar DBRS increased the haircut to the most recent appraised value in its liquidation scenario, to reflect further decline in occupancy, resulting in a projected loss severity exceeding 75%.

At issuance, Morningstar DBRS shadow-rated the U-Haul Portfolio loan (Prospectus ID#5, 1.4% of the pool) as investment grade. With this review, Morningstar DBRS confirmed that the performance of this loan remains consistent with investment-grade loan characteristics. Fifteen loans, totaling 19.0% of the pool balance, are on the servicer’s watchlist, nine of which have been flagged for performance-related issues. 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 other loans that have exhibited increased risk were analyzed with stressed loan-to-value ratios (LTVs) and/or elevated probability of default (POD) penalties, as applicable. The resulting weighted-average (WA) expected loss for these loans was approximately double the pool’s WA expected loss.

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 at (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.

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