Morningstar DBRS Downgrades Credit Ratings on Three Classes of COMM 2014-UBS5 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS5 issued by COMM 2014-UBS5 Mortgage Trust as follows:

-- Class D to CCC (sf) from BB (sf)
-- Class X-B2 to CCC (sf) from BB (high) (sf)
-- Class E to C (sf) from CCC (sf)

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

-- 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 X-B1 at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)

Morningstar DBRS changed the trends on Classes B, C, X-B1, and PEZ to Negative from Stable. All other trends are Stable, with the exception of Classes D, E, and X-B2, which have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades reflect Morningstar DBRS’ ongoing concerns and increased loss projections related to the loans in special servicing, two of which, Harwood Center (Prospectus ID#15, 2.9% of the pool) and Seacourt Pavillion (Prospectus ID#16, 2.9% of the pool), have received updated appraisals indicating further value deterioration since the prior credit rating action. For this review, Morningstar DBRS assumed a liquidation scenario for these loans, resulting in a cumulative projected loss of $35.9 million, which would fully erode the nonrated Class F and more than half of the Class E balance. Additionally, as the deal is in wind-down with the majority of loans scheduled to mature within the next six months, Morningstar DBRS notes increased refinance risk for a select number of office-backed loans, which Morningstar DBRS believes will have difficulty securing replacement financing in the near to moderate term as performance declines from issuance and decreased tenant demand have likely eroded property values, further supporting the Negative trends assigned with this review.

As of the February 2024 remittance, 52 of the original 70 loans remain in the pool, with a trust balance of $923.6 million, representing collateral reduction of 34.8% since issuance. Since Morningstar DBRS’ last review, the Campus at Greenhill loan, which was previously in special servicing, was liquidated from the trust at a realized loss of approximately $21.9 million, generally in line with Morningstar DBRS’ expectation. To date, the trust has incurred losses of approximately $50.0 million, depleting the entirety of the nonrated Class G certificate in addition to reducing the Class F balance by $6.4 million. There are 20 loans that are fully defeased, representing 31.2% of the pool balance. Seventeen loans, representing 18.6% of the pool balance, are on the servicer’s watchlist, primarily for upcoming maturity dates and five loans, representing 16.0% of the pool balance, are in special servicing.

The Harwood Center loan is secured by a 724,000-square-foot (sf) 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 tenant currently occupies 24.7% of net rentable area (NRA)). Occupancy at the property remains stressed, most recently reported at 70.0% as of September 2023, compared with 91.0% at YE2021. 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 February 2024, approximately $5.7 million is being held in reserve accounts, while an additional $14.0 million is being held in other property accounts as noted by the servicer. 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 Q4 2023 vacancy rate of 33.0%, compared with the Q4 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 75.0%.

The Seacourt Pavilion loan is secured by a 248,727-sf shopping center in Toms River, New Jersey, approximately 60 miles east of Philadelphia. The loan transferred to special servicing in May 2020 for monetary default and was last paid through December 2022. CBRE is currently the receiver and is marketing the property for sale. Per the July 2023 rent roll, the property was 78.7% occupied, relatively in line with the prior year’s occupancy rate, but significantly below the issuance figure of 94.1%. According to the July 2023 appraisal, the property reported an as-is value of $25.9 million, a considerable decline from the November 2022 and issuance appraised values of $32.7 million and $40.0 million, respectively. The debt service coverage ratio (DSCR) at the property has declined since issuance and has been well below break-even since YE2020. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in a loss severity slightly above 40.0%.

The largest specially serviced loan, State Farm Portfolio (Prospectus ID#7, 6.0% of the pool) is pari passu with the COMM 2014-UBS3 (rated by Morningstar DBRS), COMM 2014-UBS4 (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 hyper amortize until April 2029. Rental income is currently covering debt service with a reported June 2023 DSCR of 2.12 times (x).

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 a considerable value decline. For this review, this loan was analyzed with a stressed scenario, resulting in an expected loss that was more than double the pool average.

The largest loan on the servicer’s watchlist, Towne Park Ravine I, II and III (Prospectus ID#10, 4.1% of the pool), is secured by a three-property, 367,090-sf suburban office park in Kennesaw, Georgia. The loan was originally added to the servicer’s watchlist in November 2020 after three top-10 tenants vacated the property upon their lease maturities, driving occupancy and cash flow downward. Per the most recent reporting, the loan is being monitored for its upcoming maturity date in August 2024, in addition to a low occupancy rate, which was 59.0% as of YE2023.

According to the September 2023 rent roll, the former largest tenant, The Impact Partnership, LLC (25,699 sf; 7.0% of NRA) had a lease expiration date in October 2023 and based on various online sources it appears the tenant has moved its headquarters to another property, approximately 15 miles south of the subject. The largest remaining tenants at the property are Accelerated Claims, Inc. (6.3% of NRA), Breckenridge Insurance Services, LLC (5.2% of NRA), and Hapag-Lloyd Inc. (3.7% of NRA), none of which have a lease expiration date prior to loan maturity in August 2024. There is a fair amount of near-term tenant roll over, with leases representing approximately 13.0% of NRA scheduled to roll within the next 12 months. According to Reis, office properties in the Marietta/E Cobb/I-75 submarket reported a Q4 2023 vacancy rate of 21.3%, compared with the Q4 2022 vacancy rate of 21.8%, suggesting the borrower may face challenges in back-filling vacant space. The subject property was most recently appraised in June 2014 at a value of $57.5 million; however, given the sustained decline in performance coupled with the diminished investor appetite for this property type and soft submarket conditions, the asset’s value has likely declined significantly. For this review, Morningstar DBRS applied a stressed loan-to-value ratio and increased the probability of default in its analysis, resulting in an expected loss that was more than double the pool average.

ENVIRONMENTAL, SOCIAL, 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, X-B1, and X-B2 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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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)

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].