Morningstar DBRS Downgrades Credit Ratings on Five Classes; Assigns Negative Trends to Three Classes of JPMBB Commercial Mortgage Securities Trust 2014-C26

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2014-C26 issued by JPMBB Commercial Mortgage Securities Trust 2014-C26 as follows:

-- Class D to BB (sf) from BBB (low) (sf)
-- Class X-D to BB (low) (sf) from BBB (sf)
-- Class E to C (sf) from B (low) (sf)
-- Class F to C (sf) from CCC (sf)
-- Class X-E to C (sf) from B (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at AA (high) (sf)
-- Class X-C at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class EC at A (high) (sf)

Morningstar DBRS changed the trends on Classes C, X-C, and E-C to Negative from Stable, while the Negative trends on Classes D and X-D were maintained. Classes E, F and X-E have ratings that typically do not carry a trend in commercial mortgage-backed securities (CMBS) ratings. The trends on all other classes are Stable.

The credit rating downgrades and Negative trends reflect the increased loss projections relating to the three loans in special servicing, which represent 12.8% of the pool balance; specifically, the second-largest loan in the pool and the largest loan in special servicing, 1515 Market (Prospectus ID#2, 6.0% of the pool), which recently transferred in December 2023 for imminent monetary default although the loan is scheduled to mature in January 2025.

Additional details of the loan are highlighted below. All three loans were analyzed with a liquidation scenario for this review, resulting in a cumulative projected loss of $75.9 million, which would fully erode the non-rated Class NR and Class F, and a portion of Class E.

In addition, the majority of remaining loans in the pool are scheduled to mature in 2024, including several loans backed by office properties, 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. This includes International Corporate Center (Prospectus ID#21, 2.8% of pool), which is secured by a 168,585 square foot (sf) suburban office property in Rye, New York. The loan is on the servicer’s watchlist for low debt service coverage ratio (DSCR), which has been trending downward since issuance, with the most recent figure reported at 0.41 times. Occupancy has also decreased, with the April 2023 occupancy rate at 86.4%, compared to the issuance figure of 98.2 %. As such, this loan, along with other loans exhibiting increased risk, was analyzed with stressed scenarios in the analysis for this review, with the increased expected loss for the pool as a whole also contributing to the Negative trends assigned with this review.

As of the February 2024 remittance, 51 of the original 69 loans remain in the pool, representing a collateral reduction of 31.7%. In addition, 18 loans, representing 28.1% of the current pool balance, have defeased. To date, the pool has incurred $9.7 million in realized losses, all of which were contained to the non-rated class. The pool consists primarily of office, retail, and lodging properties representing 32.6%, 17.0%, and 16.7% of the pool balance, respectively. There are 12 loans, representing 22.6% of the pool balance, on the servicer’s watchlist and three loans, representing 12.8% of the pool balance, in special servicing.

1515 Market is secured by a Class A office tower in Philadelphia’s central business district and has exhibited performance declines since issuance, as the loan has been reporting DSCRs below break-even since 2021. The December 2023 rent roll noted an occupancy rate at 73.3% with tenants representing 4.7% of net rentable area scheduled to roll, compared to the issuance occupancy rate of 88.7% and the submarket vacancy for the greater Center City submarket of 14.6% as per Reis. The servicer is discussing a forbearance while dual tracking receivership and foreclosure proceedings. Value at the subject has likely declined significantly from issuance considering the performance declines and the challenged office sector. As such, Morningstar DBRS took a conservative approach in its analysis and liquidated the loan based on a stressed haircut to the issuance value, resulting in a loss severity approaching 40.0%.

The second-largest specially serviced loan and largest contributor to Morningstar DBRS’ loss projections is Heron Lakes, (Prospectus ID#4, 4.7% of the pool), which is secured by seven low-rise office buildings totaling 314,504 sf in the West Bel submarket of Houston. The loan originally transferred to special servicing in December 2018 when the borrower filed for bankruptcy protection. The asset has been real-estate owned (REO) since February 2020. Performance has suffered immensely as a result of the Coronavirus Disease (COVID-19) pandemic; however, low occupancy and cash flows date back to 2018. Current cash flows are just 50.0% of the Morningstar DBRS net cash flow at issuance, with a DSCR that has been below break-even since 2019. In addition, the occupancy was reported at 52.3% according to the October 2023 rent roll.

The December 2022 appraisal valued the property at $22.7 million, a significant decline from the issuance appraised value of $71.0 million. At the last review in March 2023, Morningstar DBRS analyzed the loan with a liquidation scenario assuming a full loss to the loan, which was maintained for this review.

ENVIRONMENTAL, SOCIAL, AND 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 at (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Classes X-A, X-B, X-C, X-D, and X-E 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 1, 2024; 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), https://dbrs.morningstar.com/research/428797
-- 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 (July 17, 2023).

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].