Morningstar DBRS Downgrades Credit Ratings on Four Classes of JPMBB Commercial Mortgage Securities Trust 2015-C28 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C28 issued by JPMBB Commercial Mortgage Securities Trust 2015-C28 as follows:

-- Class X-D to BBB (low) (sf) from BBB (sf)
-- Class D to BB (high) (sf) from BBB (low) (sf)
-- Class X-E to B (sf) from BB (low) (sf)
-- Class E to B (low) (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows:

-- 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 X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class X-C at A (sf)
-- Class C at A (low) (sf)
-- Class EC at A (low) (sf)
-- Class F at CCC (sf)

Morningstar DBRS changed the trends on Classes X-D, D, X-E, and E to Negative from Stable. All other trends are Stable, with the exception of Class F, which is assigned a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades and Negative trends reflect Morningstar DBRS’ increased loss projections for the pool, primarily attributed to the Pinnacle Office Shops and Parking loan (Prospectus ID#13, 2.5% of the pool), which transferred to the special servicer in August 2023. With this review, Morningstar DBRS considered liquidation scenarios for that loan and the transaction’s other specially serviced loan, Horizon Outlet Shoppes Portfolio (Prospectus ID#12, 2.2% of the pool), resulting in total implied losses exceeding $36.0 million. Those losses would erode the nonrated Class G balance by approximately 85.0%, significantly reducing credit support to the lowest rated principal bonds in the transaction, particularly the Class D, E and F certificates. Outside of the specially serviced loans, the pool’s second and third largest loans, Shops at Waldorf Center (Prospectus ID#2; 9.2% of the pool) and The Club Row Building (Prospectus ID#6; 5.5 % of the pool) continue to exhibit increased default risk, details of which are outlined below. In the analysis for this review, Morningstar DBRS stressed those loans with an elevated probability of default (POD) penalty and/or loan-to-value ratio (LTV) to reflect the risk of maturity default. The result of that analysis further supports the credit rating downgrades and Negative trends assigned with this review.

As of the March 2024 remittance, 54 of the original 67 loans remain in the pool, with a trust balance of $814.4 million, representing a collateral reduction of 28.7% since issuance. Since Morningstar DBRS’ last review, the Sleepy’s Market loan, which was previously in special servicing, was liquidated from the trust at a realized loss of approximately $1.4 million, generally in line with Morningstar DBRS’ expectation. Eighteen loans, representing 16.7% of the pool balance, are fully defeased, and seven loans, representing 11.8% of the pool balance, are on the servicer’s watchlist.

The Horizon Outlet Shoppes Portfolio loan transferred to special servicing in March 2020, for imminent monetary default. At issuance, the portfolio consisted of three outlet malls in Wisconsin, Washington, and Indiana, all of which became real estate owned in August 2021. The two smaller properties, Prime Outlets at Freemont in Indiana and Prime Outlets at Burlington in Washington, have been sold. Prime Outlets at Burlington was sold in March 2023 for $9.5 million with net proceeds totaling $8.8 million, and Prime Outlets at Fremont was sold in May 2022 for $4.2 million with net proceeds totaling $3.9 million. The remaining asset is Prime Outlets at Oshkosh, a 270,500-square-foot (sf) anchored retail property in Oshkosh, Wisconsin. According to the December 2023 rent roll, the property was 59.6% occupied, relatively unchanged from the prior year, but considerably below the issuance figure of 90.4%. Net cash flow (NCF) has followed a similar downward trajectory with the year-end (YE) 2023 servicer reported figure of $929,492 (a debt service coverage ratio (DSCR) of 0.84 times (x)), reflecting a 66.2% decline from the issuance figure of $2.7 million. The most recent servicer commentary notes that the property is not currently listed for sale. The November 2023 appraised value of $9.1 million represents a 6.2% and 79.8% decline from the December 2022 and issuance appraised values of $9.7 million and $45.0 million, respectively, and is well below the current whole-loan amount of $35.6 million. In the analysis for this review, Morningstar DBRS assumed a full loss to the loan, based on the remaining trust exposure and the expected proceeds at liquidation implied by a haircut to the most recent appraisal.

The Pinnacle Office Shops and Parking loan is secured by a 249,888-sf office property in Jackson, MS. The loan transferred to the special servicer in August 2023 for monetary default and, as of the March 2024 reporting, is flagged as delinquent, having last paid in September 2023. Per the December 2023 rent roll, the property was 33.9% occupied, a significant decline from the prior year’s occupancy rate of 60.4%. The decline in occupancy was primarily driven by the departure of the former largest tenant, Jones Walker LLP (23.0% of the NRA; lease expiration in December 2023). The most recent servicer commentary notes that foreclosure is expected in the second quarter of 2024 given the borrower has not submitted a workout proposal and has stated an unwillingness to cover shortfalls moving forward. According to the October 2023 appraisal, the property reported an as-is value of $6.0 million, a considerable decline from issuance appraised value of $34.5 million. Operating performance at the property has consistently declined since issuance with the loan’s DSCR remaining well below break-even since YE2021. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in a loss severity slightly in excess of 85.0%.

The largest loan on the servicer’s watchlist, The Club Row Building, is secured by a Class B office building in Midtown Manhattan. The loan was added to the servicer’s watchlist in September 2023 for a low DSCR. Occupancy at the property declined to 72.6% as of September 2023 from 86.3% in 2020 following the departure of several tenants. Notably, the property had exposure to WeWork (7.6% of NRA), which filed for bankruptcy in November 2023 and placed the subject lease on its rejection list. The tenant has since vacated its space, reducing the property’s occupancy to 65.4%. The loan most recently reported a Q3 2023 A-note DSCR of 1.51x; however, when excluding WeWork’s rent, Morningstar DBRS estimates the DSCR could fall to approximately 1.10x. Re-leasing vacant space could prove difficult given the subject’s Class B construction and declining demand for office space. There are reserves in place to fund potential costs should leases be signed, with $1.7 million in a rollover reserve and $331,471 in lockbox receipts as of March 2024. Morningstar DBRS estimates the collateral’s as-is value has declined significantly from issuance, with a balloon LTV ratio well over 100.0%, suggesting the likelihood of refinance risk at maturity in January 2025 remains high. Morningstar DBRS analyzed the loan with an elevated probability of default penalty and stressed LTV ratio, resulting in an expected loss that was approximately 70.0% greater than the pool average.

The second largest loan in the pool, Shops at Waldorf Center, is secured by a 497,000-sf anchored retail property in Waldorf, Maryland, approximately 30 miles south of Washington, D.C. The loan transferred to special servicing in July 2020 for imminent monetary default. A loan modification was executed in November 2022, and the loan subsequently returned to the master servicer in February 2023. The terms of the loan modification included a conversion to interest-only (IO) payments through the deferral period, ending in May 2024, in addition to a one-year extension option that pushes the fully extended maturity date to April 2026 from April 2025. The property was 76.3% occupied as of December 2023, down from 81.6% the prior year and 89.5% at issuance. The reported YE2023 NCF was $4.8 million (a DSCR of 1.5x), compared with $5.1 million (a DSCR of 1.1x) the prior year and $6.2 million (a DSCR of 1.4x) at issuance. The loan's modification to IO payments was responsible for the improvement in the DSCR; however, as debt service obligations increase with the continuation of principal and interest payments in May 2024, Morningstar DBRS expects the loan’s coverage to deteriorate given cash flow has trended downward, as evidenced over the last few reporting periods.

The three largest tenants at the property, PetSmart (30,900 sf; lease expiration in January 2025), LA Fitness (30,253 sf; lease expiration in June 2028) and Bob’s Discount Furniture (30,103 sf; lease expiration in March 2023) comprise approximately 19.0% of the total NRA. Per the most recent rent roll on file, dated September 2023, tenant leases representing 14.3% of the NRA have expired, or are scheduled to expire within the next 12 months (including the current largest tenant, PetSmart). The property’s average rental rate of approximately $20.0 per sf (psf) is considerably below the Q4 2023 average effective rental rate of $24.89 psf for retail properties in suburban Maryland, while the property’s vacancy rate of 23.7% is elevated when compared with the 2023 market average of 7.7%, as reported by Reis. The most recent appraisal dated July 2022 valued the property at $93.7 million, slightly above the September 2021 value of $90.2 million, but lower than the issuance appraised value of $113.1 million. Although occupancy and cash flow at the property have declined, and upcoming tenant rollover is of concern, Morningstar DBRS notes that the July 2022 appraisal value is well above the loan’s current balance of $75.3 million. In addition, the loan’s fully extended maturity date in 2026, will provide the sponsor time to backfill vacant space and work toward stabilization. Given the collateral’s declining performance, Morningstar DBRS analyzed this loan with an elevated LTV ratio and increased POD penalty, resulting in an expected loss that was more than 2.5x 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 (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)/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

-- 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].