Morningstar DBRS Downgrades Credit Ratings on Two Classes of COMM 2014-LC15 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC15 issued by COMM 2014-LC15 Mortgage Trust as follows:

-- Class E to CCC (sf) from B (low) (sf)
-- Class F to C (sf) from CCC (sf)

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

-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PEZ at A (sf)
-- Class X-B at BBB (sf)
-- Class D at BBB (low) (sf)

Morningstar DBRS changed the trends on Classes X-B and D to Negative from Stable. All other trends are Stable, with the exception of Classes E and F, 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’ ongoing concerns and loss expectations related to the loans in special servicing, which represent 33.1% of the pool balance. In addition, all of the remaining 13 loans in the pool are scheduled to mature in Q1 2024, with a select few non-specially serviced loans also exhibiting increased refinance risk as evidenced by deteriorating credit metrics and/or the borrower’s request for a loan modification. As the transaction is in wind-down, the analysis for this review generally focused on the recoverability prospects for the remaining loans in the pool.

As of the February 2024 remittance, 13 of the original 48 loans remain in the pool, with a trust balance of $196.5 million, representing a collateral reduction of 79.5% since issuance. Since Morningstar DBRS’ last review, the Hilton Garden Inn Houston loan, which was previously in special servicing, was liquidated from the trust at a realized loss of approximately $14.4 million, generally in line with Morningstar DBRS’ expectation. To date, the trust has incurred a total loss of $29.1 million, which has been contained to the nonrated Class G certificate. Four loans, representing 6.8% of the pool balance, are fully defeased and five loans, representing 60.1% of the pool balance, are on the servicer’s watchlist, primarily for upcoming maturity dates.

The largest specially serviced loan, 100 Westminster, is secured by a 361,462-square-foot (sf), 19-story, Class A office building located in Providence, Rhode Island. The loan transferred to the special servicer in August 2023 in conjunction with the borrower’s request for relief and, as of the most recent reporting, failed to repay prior to the original maturity date of February 5, 2024. The borrower has requested a maturity extension, which is currently under review with the lender. At issuance, the property was 91.8% occupied, with the largest tenants including Bank of America Corporation (BofA), Providence Equity Partners LLC, and Hinckley, Allen & Snyder LLC. These tenants had been at the property since 1992 or earlier and occupied approximately 50.0% of the net rentable area (NRA). Although the property has seen volatility in occupancy, with two large tenants, US Attorney’s Office (formerly 8.0% of the NRA) and BofA (formerly 20.1% of the NRA), vacating upon their respective lease expiration dates in December 2022 and April 2023, there has been positive leasing momentum at the property with the borrower signing over 60,000 sf of new leases in 2023. The largest leases signed were with Marcum LLC (23,000 sf; 6.3% of the NRA) and Bally’s (23,000 sf; 6.3% of the NRA), with both of these tenants back-filling a portion of the former BofA space. As of the September 2023 rent roll, the property was approximately 80.0% occupied. Near-term rollover is minimal with seven leases, representing 5.9% of the NRA, either operating on a month-to-month term, or scheduled to roll within the next 12 months. According to Reis, office properties in the central submarket reported a Q4 2023 vacancy rate of 16.9%, relatively in line with the prior year.

According to the financial reporting for the trailing six-month period (T-6) ended June 30, 2023, the property reported an annualized net cash flow (NCF) of $3.9 million (a debt service coverage ratio (DSCR) of 1.30 times (x)), compared with the YE2022 figure of $5.0 million (a DSCR of 1.68x) and the Morningstar DBRS issuance NCF of $3.4 million (a DSCR of 1.13x). Although the evidence of borrower cooperation and the potential for a loan maturity extension are promising, Morningstar DBRS considers refinance risk to be elevated as the value of the collateral has likely declined from issuance, given the contraction in occupancy, soft submarket fundamentals, and generally low investor appetite for this asset type. In the analysis for this review, Morningstar DBRS took a conservative approach and applied a stressed haircut to the issuance value, resulting in a loss severity in excess of 25.0%.

Moss-Bauer Apartments (Prospectus ID#24; 3.3% of the pool balance) is secured by a 28-unit multifamily building in the central business district of New Orleans, Louisiana, just south of the French Quarter. The loan transferred to the special servicer in March 2018 as the borrower was not compliant with cash management provisions. According to the servicer, a settlement/modification agreement was executed in August 2022, and the loan was brought current for a period of time but was last paid through October 2023. The borrower initially planned to pay off the loan during the open period that began in November 2023 but, ultimately, there was insufficient refinance proceeds available. As such, the borrower has expressed its intent to transition the property to the lender with the guarantor agreeing to pay the $1 million limited guaranty as part of the forbearance agreement. According to the January 2024 site inspection, the property was 71.4% occupied, a decline from the November 2022 figure of 85.7%. In addition, the loan has reported a DSCR well below break-even since 2020 with limited reporting for 2021 and 2022. The July 2023 appraisal valued the property at $8.3 million, compared with the issuance appraisal value of $11.6 million. For this review, Morningstar DBRS analyzed the loan with a liquidation scenario, resulting in a loss severity in excess of 35.0%.

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.

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
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].