Morningstar DBRS Confirms All Credit Ratings, Changes Trends on Four Classes of COMM 2015-LC21 Mortgage Trust

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-LC21 issued by COMM 2015-LC21 Mortgage Trust as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class X-C at BBB (sf)
-- Class X-D at B (high) (sf)
-- Class D at BBB (low) (sf)
-- Class E at B (sf)
-- Class F at CCC (sf)

The trends on Class D, Class E, Class X-C, and Class X-D were changed to Negative from Stable. Class F is assigned a credit rating that does not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All other classes have Stable trends.

The trend changes on the Class D and Class E Certificates reflect concerns related to a number of loans that Morningstar DBRS has identified as being at increased risk of maturity default because of declining cash flows, increased vacancy, and general lending challenges within the office sector. Since the last credit rating action, two loans have been liquidated from the trust. Realized losses to the trust currently total $18.8 million, and have eroded nearly half of the original balance of the unrated Class G certificate. Two loans remain in special servicing, including one that has exhibited further decline in reported appraised value since the last credit rating action.

At issuance, the transaction consisted of 103 fixed-rate loans secured by 198 commercial and multifamily properties, with a trust balance of $1.3 billion. As of the March 2024 remittance, 85 loans remain outstanding with a trust balance of $918.8 million, reflecting collateral reduction of 30.5% since issuance. There are currently 23 fully defeased loans, representing 24.3% of the current pool balance. The notable principal paydown and defeasance serves as a mitigant against the potential for further credit deterioration. All of the remaining loans have maturity or ARD dates in 2025. Outside of the specially serviced loans, Morningstar DBRS has identified seven loans, representing 14.8% of the pool balance, to be at increased risk of maturity default, all of which are backed by office properties. Given the current interest rate and capitalization rate environment, as well as declining investor demand for office properties, Morningstar DBRS remains cautious in its view of the transaction’s office concentration. Four of the seven office loans, representing 8.0% of the pool, have either transferred to special servicing or are on the servicer’s watchlist. In total, 22 loans, representing 27.6% of the pool, are being monitored on the servicer’s watchlist and two loans, representing 5.9% of the current pool, are in special servicing. As part of this review, Morningstar DBRS increased the probability of default for distressed loans to reflect their current risk profile and, in certain cases, applied stressed loan-to-value (LTV) ratios. In addition, Morningstar DBRS analyzed the smaller of the two specially serviced loans with a liquidation scenario, resulting in an implied loss severity of 75.0%.

The largest loan in special servicing is Meridian at Brentwood (Prospectus ID#3, 4.1% of the pool), which is secured by a mixed-use office/retail building in Brentwood, Missouri. The loan transferred to special servicing in June 2023 due to non-monetary default related to the borrower’s non-compliance with the initiation of cash management. Cash management was triggered after the largest tenant, BJC Health System (BJC), failed to renew its lease prior to the original 2022 expiration. The tenant previously leased 58.0% of net rentable area (NRA), however, according to the September 2023 rent roll, BJC appears to have downsized and currently leases 39.4% of the NRA on a lease that expires in December 2025. Occupancy has declined as a result, to 84.0% as of September 2023 from 97.0% at YE2021. Cash flow has also declined, resulting in a debt service coverage ratio (DSCR) of 0.26 times (x) as of the Q3 2023 financials, down from the YE2022 DSCR of 1.37x. Although the borrower and special servicer appear to be negotiating terms of reinstatement, given the previous default and the recent occupancy and cash flow volatility, Morningstar DBRS analyzed this loan with a stressed LTV and elevated probability of default, resulting in an expected loss approximately 150.0% greater than the pool average.

Morningstar DBRS analyzed several other loans with stressed LTVs and elevated probability of defaults, including the Santa Monica Clock Tower (Prospectus ID#8, 2.9% of the pool) and Delaware Corporate Center I & II (Prospectus ID#9, 2.6% of the pool) loans, both of which are secured by office collateral and are being monitored on the servicer’s watchlist. The Santa Monica Clock Tower loan, secured by an office property in Santa Monica, California, has exhibited cash flow decline following the departure of several tenants in 2020 and 2021. Occupancy declined to 66.6% in 2021 from 99.0% in 2019 and has remained at 66.6% with an average rental rate of $93.21 per square foot (psf) as of the September 2023 rent roll. According to Reis, as of YE2023, Class A office properties in the Santa Monica submarket reported a vacancy rate of 23.2% with average asking rents of $61.68 psf. The loan’s DSCR was most recently reported at 1.55x for the trailing nine-month period ended September 30, 2023, up from the YE2022 DSCR of 1.14x. Morningstar DBRS continued to analyze this loan with a stressed LTV and elevated probability default, resulting in an expected loss level over 100.0% greater than the pool average.

The Delaware Corporate Center I & II loan, secured by a 200,275-sf office complex in Wilmington, Delaware, had transferred to special servicing in March 2022 after failing to comply with cash management provisions following the notice of nonrenewal by the collateral’s former largest tenant, E.I. Dupont (26.6% of NRA). The loan has since returned back to the master servicer in June 2023 after the borrower cured the default. The loan continues to be monitored on the servicer’s watchlist due to the continued cash management as well as low DSCR. The former E.I. Dupont space remains vacant, and the September 2023 rent roll reported an occupancy rate of 75.9%, down from 96.0% at YE2022, with an average rental rate of $26.88 psf. According to the Q3 2023 financials, DSCR fell to 0.82x from 2.36x at YE2022 due to the departure of E.I. Dupont. In the Morningstar DBRS analysis, a stressed LTV and elevated probability of default was applied, resulting in an expected loss level over 200.0% greater than the pool average.

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).

Class X-A, Class X-B, Class X-C, and Class X-D 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), 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 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

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