Morningstar DBRS Downgrades Two Classes of COMM 2014-CCRE18 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2014-CCRE18 issued by COMM 2014-CCRE18 Mortgage Trust as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-5 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class PEZ at A (high) (sf)
-- Class X-B at BBB (sf)
-- Class D at BBB (low) (sf)

The trends on Classes D, E, and X-B are Negative. Class F does not carry a trend given the C (sf) credit rating. The trends on all remaining classes are stable.

The credit rating downgrades and trend changes reflect the stressed value estimates for the collateral backing select loans in the pool that Morningstar DBRS believes are unlikely to be paid off at their respective 2024 maturity dates. One of those loans, Southfield Town Center (Prospectus ID#4, 11.9% of the pool), transferred to special servicing in March 2024 for imminent default ahead of its May 2024 maturity. Although the loan is performing in line with issuance expectations, the collateral’s suburban location and soft submarket suggest the value has likely declined since issuance, particularly amid the current environment for office properties in secondary and/or suburban locations. As a result, the refinance prospects are cloudy and should the loan ultimately be liquidated, Morningstar DBRS believes a loss to the trust is likely. 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.

At issuance, the transaction consisted of 49 loans with an original trust balance of $996.3 million. As of the March 2024 remittance report, 28 loans remained in the transaction with a current trust balance of $460.4 million, representing a collateral reduction of approximately 53.8% since issuance. In addition to significant paydown from issuance, the transaction also benefits from defeasance, as eight loans, totaling 17.8% of the pool, are fully defeased. Eighteen loans, representing 66.2% of the pool, are currently monitored on the servicer’s watchlist, and the aforementioned Southfield Town Center is the only loan in special servicing. All 31 of the pool’s remaining loans are scheduled to mature by July 2024. Although the watchlist loans are concentrated in those being monitored for upcoming maturity, there are six loans, representing 17.2% of the pool, which are being monitored for credit issues, such as low debt service coverage ratios (DSCRs), low occupancy rates, and upcoming tenant rollover.

The pool benefits from the relatively low concentration of loans backed by office properties (19.9% of the pool); however, the office loans are generally significantly weaker than the pool as a whole, with the weighted-average expected loss (EL) approximately 150.0% greater than the pool average EL. The transaction is heavily concentrated in loans backed by retail collateral, with 10 loans, representing 44.9% of the pool, including the largest loan in the pool, Bronx Terminal Market (Prospectus ID#1, 29.3% of the pool), which is secured by a 912,333-square foot (sf) anchored retail center in The Bronx. The loan reported a DSCR of 1.74 times (x) as of Q3 2023, and the collateral property has long-term leases with all its major tenants, including Target (20.0% of net rentable area (NRA), lease expires October 2033), BJ’s Wholesale Club (14.3% of NRA, lease expires August 2029), and The Home Depot (13.7% of NRA, lease expires February 2034).

Given the current interest rate and capitalization (cap) rate environment, as well as declining investor demand for office properties, Morningstar DBRS remains skeptical regarding the refinancing prospects for the two largest office loans in the pool. The 399 Thornall Street loan (Prospectus ID#8, 7.0% of the pool) is secured by a 335,000-sf, Class A, suburban office property in Edison, New Jersey. In addition to being monitored on the watchlist for its upcoming June 2024 maturity, the loan has also been flagged for low DSCR and occupancy since 2021 when occupancy fell significantly after the property’s largest tenant downsized and the second largest tenant vacated. More recently, Mazar’s USA LLP (7.4% of NRA), vacated its space at its lease expiry in July 2023. The sponsor has been unable to back fill the vacant space, as occupancy was reported at 35.6% as of the September 2023 rent roll. Occupancy is expected to decline further as former largest tenant, Daiichi Sankyo (7.2% of NRA), will vacate its remaining space at the subject at lease expiry in May 2024.

According to Reis, the Metropark/Edison/Woodbridge submarket reported a vacancy rate of 14.1% for Class A properties as of YE2023. As of the Q3 2023 financials, the loan reported a DSCR of just 0.59x. Given occupancy and cash flow have remained depressed since 2021, a successful loan payoff at maturity in June 2024 is not likely. Although the loan does report a notable amount of reserves with $5.0 million in tenant reserves and $1.6 million in other reserves, the property’s suburban location and lack of demand for office space will make re-leasing efforts difficult. Morningstar DBRS estimates the as-is value has fallen significantly from issuance, with a balloon loan-to-value ratio (LTV) well over 100.0%.

The largest office loan in the pool, Southfield Town Center, is secured by a 2.15 million-sf, five-building suburban office property in the Detroit suburb of Southfield, Michigan. The loan transferred to special servicing with the March 2024 remittance due to imminent monetary default as the borrower was unable to secure refinancing ahead of the loan’s May 2024 maturity date. Workout strategy discussions are still in their preliminary stages; however, the special servicer has stated that a forbearance is being considered and that a loan modification would require additional principal paydown and significant contributions to loan reserves. Occupancy remained stable at 77.5% as of YE2023, compared with 79.0% and 80.0% at YE2022 and YE2021, respectively, and is outperforming the North Southfield submarket YE2023 vacancy of 27.1%, according to Reis. Tenants representing 8.0% of NRA are scheduled to roll in 2024. The loan continues to perform above issuance expectations, reporting a DSCR of 2.00x as of YE2022 and 2.06x as of Q3 2023. Although the collateral is performing, the suburban location and relatively high LTV of 78.5% on the issuance balance and appraisal pushes the loan’s baseline EL up significantly, with the resulting figure 180.0% higher than the pool average. Morningstar DBRS believes the As-Is LTV on a stressed value to reflect current market conditions is likely much higher.

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 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 1, 2024), which can be found on https://dbrs.morningstar.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
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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

North American CMBS Insight Model v 1.2.0.0, (March 1, 2024),
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, (July 17, 2023).

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