Morningstar DBRS Downgrades Eight Classes of JPMBB Commercial Mortgage Securities Trust 2015-C31

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C31 issued by JPMBB Commercial Mortgage Securities Trust 2015-C31 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class F at C (sf)

The trends on Classes B, C, X-B, X-C, and EC are Negative. Classes D, E, F, and X-D have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. The trends on all remaining classes are Stable.

The credit rating downgrades reflect the increased loss projections from the loans in special servicing, primarily driven by the two largest specially serviced loans, Civic Opera Building (Prospectus ID#1, 10.6% of the pool) and the Sunblet Portfolio (Prospectus ID#3, 8.4% of the pool), as further discussed below. Morningstar DBRS continues to project significant losses related to the specially serviced loans, which together represent 20.1% of the pool, as reflected by the distressed credit ratings assigned to Classes D, E, F, and X-D. While Morningstar DBRS does not currently expect losses will exceed the Class D bond, the vast majority of remaining loans in the pool are scheduled to mature in the second half of 2025. In addition to the office-backed loans that are being liquidated, Morningstar DBRS has identified four additional loans representing 12.3% of the pool that could pose possible refinance risk.

Additionally, Morningstar DBRS’ credit ratings are constrained by Morningstar DBRS’ expectation of accruing interest shortfalls prior to repayment, which has also contributed to Morningstar DBRS’ downgrades and trend changes. Interest shortfalls currently total $3.3 million, up from a total interest shortfall amount of $1.2 million at the time of the last credit rating action. Unpaid interest continues to accrue month over month, driven by advances deemed non-recoverable in addition to special servicing fees and appraisal subordinate entitlement reduction (ASER) from the loans in special servicing. Morningstar DBRS has minimal tolerance for unpaid interest to high investment-grade rated bonds, limited to one to two remittance cycles for the AA (sf) and A (sf) credit rating categories.

As of the March 2024 remittance, 49 loans of the original 58 remain outstanding with a pool balance of $763.9 million, representing a collateral reduction of 25.6% since issuance. Of the remaining loans, 16 loans, representing 26.3% of the pool balance, have fully defeased. Four loans are in special servicing, totaling 20.1% of the pool balance, including the two of the top three loans. Outside of defeased loans, loans backed by office properties make up approximately 32.0% of the pool balance while lodging properties make up approximately 14%. In addition, 10 loans representing 18% of the pool balance are on the servicer’s watchlist. All but two of those loans have been flagged for performance and/or credit related reasons.

The largest loan in the pool and in special servicing, Civic Opera Building, is secured by the borrower’s fee-simple interest in a 915,162-square-foot office property in Chicago’s West Loop District and is pari passu with a companion note in the JPMBB 2015-C32 transaction, which is also rated by Morningstar DBRS. The loan transferred to special servicing in June 2020 following the borrower’s request for forbearance relief as a result of the coronavirus pandemic. The loan has been delinquent since May 2021, and a receiver has been appointed. According to the most recent servicer commentary from March 2024, the lender has submitted a recourse claim and is continuing with the foreclosure process and is currently in the discovery phase.

Occupancy continues to decline and remains well below the 92.4% at issuance. According to the September 2023 rent roll, the property was 56.8% occupied, as compared with the September 2022 figure of 63.7% and the YE2021 figure of 69.4%. The largest tenants are Bnd Civic Wacker, LLC (6.8% of the net rental area (NRA), expiry in November 2033); Teamworking COB LLC (5.2% of the NRA, lease expiry in April 2028); Natural Resources (2.8% of the NRA, expiry in March 2038); and Perficient, Inc. (2.4% of the NRA, expiry in June 2030). There is minimal upcoming rollover risk, with leases representing 5.7% of the NRA scheduled to expire by YE2024. The most recent appraisal obtained by the special servicer, dated December 2023, valued the property at $119.8 million compared with the April 2023 value of $128.3 million, September 2022 value of $159.4 million, and February 2021 figure of $165.0 million. Morningstar DBRS’ analysis included a liquidation scenario based on a stress to the December 2023 appraised value to reflect the continuously declining occupancy, upcoming rollover, and weak submarket fundamentals, resulting in an increased projected loss severity approaching 75% with this review.

The second-largest loan in special servicing, Sunbelt Portfolio, is secured by the fee-simple interests in a portfolio of three office properties in Birmingham, Alabama, and Columbia, South Carolina. The loan transferred to special servicing in January 2022 for imminent monetary default and with the March 2024 remittance remains current on payments. At last review, the servicer commentary suggested an agreement had been reached with the borrower to return the loan to the master servicer; however, the borrower had recently submitted a short-term payment deferral while the special servicer works with the borrower to use lockbox funds to cover shortfalls. Concurrently, the special servicer is dual tracking the appointment of a receiver.

The portfolio has experienced precipitous occupancy declines in recent years, with the most recent figure showing the properties were 64.4% occupied as of September 2023, compared with 72.2% occupancy as of YE2021. Due to declining occupancy, cash flows have fallen, with the September 2023 debt service coverage ratio (DSCR) at 0.79 times (x), down from 1.38x in YE2021. Largest tenants as of the September 2023 rent roll include Nelson Mullins Riley & Scarbou (11.0% of the NRA, lease expiry in July 2030), Shipt Inc (8.4% of the NRA, lease expiry in October 2030), and Burr & Forman LLP (7.9% of the NRA, lease expiry in December 2034). Through YE2024, there is minimal rollover concern at approximately 4.0% of the NRA. To date, there is no updated appraisal for the subject, which was valued at $203.3 million at issuance; however, Morningstar DBRS expects the value to have declined. The portfolio’s location within secondary and tertiary markets, declining occupancy rates, upcoming maturity date in July 2025, and general uncertainty with office assets will complicate any workout and eventual refinance or disposition in the near future. Morningstar DBRS’ analysis included a liquidation scenario based on a stress to the issuance appraised value, resulting in a projected loss severity approaching 30% with this review.

Another office loan of concern, Highland Landmark I (Prospectus ID#5, 5.0% of the pool) has been identified as a possible refinance risk as it approaches maturity in August 2025. The loan is secured by a suburban Class A office property in Downers Grove, Illinois. The subject was added to the servicer’s watchlist in December 2023 for a cash trap activation tied to the eventual departure of the large tenant, Advocate Health Center (68% of the NRA) at its April 2024 lease expiration. As of the September 2023 rent roll, the subject was 85% occupied but occupancy is expected to drop to approximately 17% taking into account the Advocate Health Center’s departure. Based on the March 2024 reserve report, $12.4 million has been trapped and is currently being held in the rollover account. Although a new appraisal has not been completed to date, Morningstar DBRS expects a significant value decline, which will inevitably complicate takeout financing efforts in 2025. The loan was analyzed with an increased probability of default (POD) for an expected loss (EL) more than double the pool average.

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, X-B, X-C, and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO credit 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 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 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 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)

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/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

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].