Morningstar DBRS Downgrades Three Classes of JPMCC Commercial Mortgage Securities Trust 2014-C20, Changes Trends to Negative

DBRS Limited (Morningstar DBRS) downgraded the ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2014-C20 issued by JPMCC Commercial Mortgage Securities Trust 2014-C20 as follows:

-- Class C to BB (sf) from BBB (high) (sf)
-- Class EC to BB (sf) from BBB (high) (sf)
-- Class D to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- 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 X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)

Morningstar DBRS changed the trends on Classes B, C, X-B, and EC to Negative from Stable. Classes D, E, F, and G have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All other classes have Stable trends.

As of the February 2024 remittance, only 14 of the original 37 loans remain outstanding with a pool balance of $313.1 million, representing a collateral reduction of 64.3% since issuance. Of the remaining loans, three, representing 7.3% of the pool balance, have fully defeased.

The credit rating downgrades and trend changes reflect Morningstar DBRS’ concerns regarding a number of loans at increased risk of maturity default. All but two of the remaining loans in the pool are scheduled to mature within the next six months. While Morningstar DBRS expects the majority of loans will repay from the pool, a concentrated number of loans exhibit increased default risk given weak credit metrics. Outside of the two loans in special servicing, an additional three loans, representing 15.4% of the pool balance in aggregate, have been identified by Morningstar DBRS as being at risk for maturity default. Should these loans default as they near their respective maturity dates, Morningstar DBRS’ loss projections may increase to reflect additional adverse selection supporting the credit rating downgrades and Negative trends. 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 $6.5 million, up from a total interest shortfall amount of $4.6 million at the time of the last rating action. Unpaid interest continues to accrue month over month, driven by special servicing fees and interest shortfalls deemed non-recoverable from the second-largest loan in special servicing.

The largest loan in special servicing, 200 West Monroe (Prospectus ID#6; 14.7% of the pool balance) is secured by a 23-story, Class B office property in Chicago. The loan has been monitored for performance declines related to occupancy losses over the last several years and transferred to special servicing with the February 2024 remittance. The loan was last paid through December 2023, and the borrower is reportedly unwilling to fund operating shortfalls at this time. According to the September 2023 rent roll, the property was 66.8% occupied, down from 72% at YE2022 and 84.2% at issuance. Cash flow has also been in decline year over year, and the loan reported a debt service coverage ratio (DSCR) of 0.21 times (x) at YE2023. The in-place tenant roster is considered granular, with no tenant representing more than 5.3% of the net rentable area (NRA). Leases representing approximately 11.0% of the NRA are scheduled to expire by YE2024. According to a Reis report from Q4 2023, office properties within the Central Loop submarket reported a vacancy rate of 14.1%, remaining in line with the 14.2% reported last year. Although there have been no updated appraisals since issuance, Morningstar DBRS expects the property value has declined significantly since issuance given the declining occupancy rate and cash flow, and soft submarket. In its analysis, Morningstar DBRS liquidated the loan from the pool based on a conservative haircut to the issuance appraised value, suggesting a projected loss severity approaching 70%.

The second-largest loan in special servicing, Lincolnwood Town Center (Prospectus ID#4; 14.1% of the pool balance) is backed by a regional mall in the northern Chicago suburb of Lincolnwood, Illinois. The property became real estate owned in August 2021. Recent communication with the servicer indicates the subject is under contract to be sold. The most recent appraisal reported by the servicer, dated April 2023, valued the property at $15.0 million, in line with the May 2022 appraised value of $15.2 million, but a drastic decline from the issuance value of $89.1 million. In its analysis, Morningstar DBRS’ liquidation scenario for this loan considered outstanding advances and expected servicer fees, suggesting a projected loss in excess of 80%.

The largest of the three additional loans Morningstar DBRS identified as being at increased risk of maturity default is Westminster Mall (Prospectus ID#11; 7.8% of the pool balance), which is secured by a regional mall in Orange County, California, and is on the servicer’s watchlist for performance declines following the loss of former noncollateral anchor Sears. More recently, the loan has also been flagged for its upcoming loan maturity in April 2024. Per the servicer, the borrower received a payoff quote for November 2023 but was unable to repay the loan. The empty noncollateral anchor boxes have reportedly been acquired by Shopoff Realty Investments, and media sources indicate Westminster City Council had approved initial plans for the redevelopment of those two sites in December 2022. According to the most recent financials, occupancy was reported at 75.1% as of September 2023, down from 84.2% at YE2022 and 95.0% at issuance. The property is not cash flowing, with the year to date September 30, 2023, DSCR reported to be -0.36x, compared with the YE2022 DSCR of 0.23x. Despite these performance declines, the loan has been kept current by the sponsor, Washington Prime Group. Morningstar DBRS expects the sponsor’s commitment is likely related to the redevelopment value of the property in the long term. However, Morningstar DBRS believes the loan is at high risk of maturity default. This concern was a contributing factor in the credit rating actions described above.

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 the 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
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

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].