Morningstar DBRS Downgrades Credit Ratings on Six Classes of JPMBB Commercial Mortgage Securities Trust 2015-C27

DBRS Limited (Morningstar DBRS) downgraded ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by JPMBB Commercial Mortgage Securities Trust 2015-C27 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3A1 at AAA (sf)
-- Class A-3A2 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class X-A at AAA (sf)

The trends on Classes A-S, B, C, X-A, X-B, X-C, and EC are Negative. Classes D, E, and F no longer carry a trend given the C (sf) credit rating. The trends on all remaining classes are Stable.

The credit rating downgrades and Negative trends reflect Morningstar DBRS’ increased loss projections since the last credit rating actions, primarily attributed to the 717 14th Street loan (Prospectus ID#4, 6.4% of the pool), which is collateralized by a Class B office building in Washington, D.C. With this review, Morningstar DBRS considered liquidation scenarios for that loan and the transaction’s other specially serviced loan, resulting in total implied losses exceeding $70.0 million (with an average loan level loss severity exceeding 60.0%). Those scenarios suggest losses would be incurred by the Class D certificate, eroding support for the certificates above, particularly the Class B and C certificates, supporting the downgrade for Class C and Negative trends for both classes.

The Negative trend assigned to Class A-S generally reflects the liquidated loss projections for the two specially serviced loans and Morningstar DBRS’ concerns surrounding the refinance prospects for select loans in the pool, most notably for the largest loan in the pool, The Club Row Building (Prospectus ID#1, 18.8% of the pool). Morningstar DBRS considered the refinance prospects for the remaining loans in the pool, most of which mature in 2025, by estimating the current value (based on the in-place cash flows and market cap rates implied by recent transaction activity) and the likely metrics required for a replacement loan (based on recently closed commercial mortgage-backed securities (CMBS) loans for the same or similar property types). Based on that analysis, the Club Row Building had a significant refinance gap. As the Class A-S certificate is likely reliant on the full repayment of that loan in order to be fully repaid, the Negative trend was warranted.

In addition to the increase in projected losses from the liquidated loans and other loans showing value declines from issuance, the rating downgrades and C (sf) ratings on the most junior rated tranches are also reflective of the expectation that interest shortfalls could continue to grow. As of the February 2024 remittance, interest shortfalls total $6.7 million, an increase from $4.1 million during the March 2023 review, with shortfalls continuing to be reported up through the Class D certificate.

According to the February 2024 remittance, 35 of the original 44 loans remain in the pool, representing a collateral reduction of 30.1% since issuance. Five loans, representing 5.3% of the pool, are fully defeased. There are 13 loans, representing 46.4% of the pool on the servicer’s watchlist, including the largest loan in the pool, and two loans, representing 18.9% of the pool in special servicing. The transaction is concentrated by property type with eight loans, representing 38.4% of the pool, secured by office collateral, including the largest loan and the aforementioned specially serviced 717 14th Street loan. All but one of the nondefeased loans, including all eight office loans, are scheduled to mature by February 2025, with a select few non-specially serviced loans exhibiting increased refinance risk. As the transaction is in the ninth year since issuance, with most loans coming due within the next 12 months, the analysis for this review generally focused on the recoverability prospects for the remaining loans in the pool.

The 717 14th Street loan is secured by a 114,204-square-foot office property in Washington, D.C. The loan was transferred to special servicing in February 2023 for imminent monetary default after the borrower was unable to fund operating shortfalls. At issuance, the building was fully occupied by various D.C. government entities, General Services Administration - U.S. Department of the Treasury, and CVS, which are all investment-grade tenants. Following the departure of DC Auditors in August 2022, occupancy declined to 64.4%, and, in March 2023, the DC Office of the Inspector General (10.0% of the net rentable area (NRA)) vacated, resulting in occupancy declining to 54.6% as of the June 2023 rent roll. According to Reis, the subject’s submarket reported a vacancy rate of 23.1% for Class B office properties as of YE2023.

Although the property is close to the White House, the lack of demand for Class B office space and high submarket vacancy rate have contributed to the absence of leasing activity in the last few years. At the current leased rate, Morningstar DBRS estimates that the debt service coverage ratio (DSCR) could fall to under 0.70 times (x). The loan is currently paid through June 2023 and a receiver has been appointed, with an updated appraisal currently in process. Given the significant vacancy, Class B construction, and lack of investor appetite for office properties, Morningstar DBRS believes the collateral’s current value is significantly impaired compared with its issuance value of $56.0 million. Morningstar DBRS analyzed this loan with a liquidation scenario, based on a significant haircut to the issuance valuation, resulting in a loss severity in excess of 70.0%.

The largest specially serviced loan in the pool, The Branson at Fifth (Prospectus ID#3, 12.5% of the pool), is secured by a mixed-use (multifamily and retail) property in Midtown Manhattan, New York. The loan was transferred to special servicing for a second time in September 2021 because of monetary default and was last paid through March 2022. Performance has been depressed since 2019 when the collateral property’s largest commercial tenant, Domenico Vacca, vacated ahead of its lease expiry. According to the June 2023 rent roll, the multifamily portion was 96.4% occupied with an average rental rate of $6,008 per unit. There is one commercial tenant signed to a month-to-month lease and, according to the special servicer commentary, there are currently no viable prospects for the remainder of the commercial space. Despite the healthy performance for the multifamily portion of the collateral, the loan continues to underperform, most recently reporting a DSCR of 0.08x as of Q2 2023. As noted at issuance, the majority of the total property cash flows came from the commercial space. According to special servicer commentary, the borrower has proposed a loan modification and maturity extension, with the proposal reportedly contemplating a multi-year loan maturity extension as well as additional reserve deposits to an interest reserve and capital improvement reserve. An updated appraisal as of September 2023 valued the property at $38.9 million, in line with the October 2022 appraised value of $38.2 million and a -67.3% variance from the issuance value of $119.0 million. Although the sponsor appears committed and is potentially willing to inject additional equity, given the severe as-is value decline and lack of leasing activity for the commercial space, Morningstar DBRS analyzed this loan with a liquidation scenario, resulting in a loss severity in excess of 65.0%.

Morningstar DBRS remains concerned about the refinancing prospects for several loans being monitored on the servicer’s watchlist, including The Club Row Building and 4141 North Scottsdale Road (Prospectus ID#9, 4.1% of the pool), both of which are secured by office properties that have experienced large vacancies and cash flow declines in recent years. The Club Row Building, secured by a Class B office building in Midtown Manhattan, was added to the servicer’s watchlist in November 2023 for a cash trap activation because the DSCR fell below 1.10x during the T-12 period ended June 30, 2023. Occupancy declined to 73.0% as of September 2023 from 86.3% in 2020 following the departure of several tenants. Notably, the property had exposure to WeWork (7.6% of NRA), which filed for bankruptcy in November 2023 and placed the subject lease on its rejection list. The tenant has since vacated its space, reducing the subject’s occupancy to 65.4%. The loan most recently reported a Q3 2023 DSCR of 1.51x; however, when excluding WeWork’s rent, Morningstar DBRS estimates the DSCR could fall to approximately 1.10x. Re-leasing the property could prove difficult given the subject’s Class B construction and declining demand for office space; there are reserves in place to fund costs should leases be signed, with $2.5 million in a rollover reserve and $635,000 in lockbox receipts reported for February 2024. Morningstar DBRS estimates the as-is value has fallen significantly from issuance, with a balloon loan-to-value ratio well over 100.0%, suggesting a refinance at maturity in January 2025 appears unlikely.

The 4141 North Scottsdale Road loan is secured by a Class A, low-rise, suburban office building in Scottsdale, Arizona. The loan was previously specially serviced but was returned to the master servicer in April 2023 after the sponsor brought the loan current. It is being monitored on the servicer’s watchlist for low DSCR following the departure of the property’s largest tenant in 2022. The property remains 16.6% occupied as of September 2023, but despite the very low in-place occupancy, the sponsor has continued to make principal and interest payments out-of-pocket. The property was most recently appraised in August 2022 at a value of $29.5 million, representing an 18.3% decline from the issuance value of $36.1 million but still in excess of the current loan amount of $24.1 million. The Scottsdale submarket remains soft, reporting a YE2023 vacancy rate of 18.9%, according to Reis. In the absence of any significant leasing activity, a loan modification or loan extension will likely be required as the loan matures in February 2025. Given the declining office market since the property’s last appraisal in August 2022, Morningstar DBRS believes the current as-is value of the property is not sufficient to cover the current loan amount and, should the sponsor ultimately decide to hand back the keys to the lender, a loss to the trust is likely.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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) at https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, and X-C 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 the North American CMBS Surveillance Methodology (March 1, 2024), which can be found on dbrsmorningstar.com under Methodologies & Criteria. https://dbrs.morningstar.com/research/428798.

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
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 (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0 https://dbrs.morningstar.com/research/428797

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria, (September 22, 2023),
https://dbrs.morningstar.com/research/420982/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings, (August 23, 2023),
https://dbrs.morningstar.com/research/419592/north-american-commercial-mortgage-servicer-rankings

Rating North American CMBS Interest-Only Certificates, (December 13, 2023),
https://dbrs.morningstar.com/research/425261/rating-north-american-cmbs-interest-only-certificates

Legal Criteria for U.S. Structured Finance, (December 7, 2023),
https://dbrs.morningstar.com/research/425081/legal-criteria-for-us-structured-finance

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].