Morningstar DBRS Changes Trends on Four Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23 to Negative from Stable, Confirms Credit Ratings on All Classes

DBRS Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C23 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C23 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 AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PST at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at BB (low) (sf)
-- Class X-FG at B (sf)
-- Class G at B (low) (sf)

Morningstar DBRS changed the trends on Classes E, F, G, and X-FG to Negative from Stable. All other trends are Stable.

The credit ratings confirmations are supported by the continued stable performance of the pool, reinforced by a healthy weighted-average (WA) pool debt service coverage ratio (DSCR) of 1.74 times (x), no loans being in special servicing, and only seven loans representing 6.5% of the pool on the servicer's watchlist. However, the Negative trends on Classes E, F, G, and X-FG are a result of the transaction's exposure to eight loans, representing 23.5% of the pool, that Morningstar DBRS expects may be at an increased refinance risk as a result of performance concerns, increased rollover risk prior to maturity, and/or general market concerns as a majority of the remaining loans are scheduled to mature through H1 2025.

As of the April 2024 remittance, 66 of the original 75 loans remain in the pool, representing a collateral reduction of 21.9%. Sixteen loans, representing 10.6% of the pool, have been fully defeased and no loans are in special servicing. The seven loans on the servicer's watchlist represent a very modest portion of the pool, totaling 6.5%, with only three of these loans, representing 3.6% of the pool, being flagged for performance- or occupancy-related concerns. Outside of the defeased loans, loans backed by office properties make up only 5.7% of the pool balance while the largest concentration of loans, making up approximately 26.7% of the pool balance, is backed by retail properties.

The largest loan on the servicer's watchlist, Aviare Place Apartments (Prospectus ID#16; 2.4% of the pool), is secured by a 266-unit multifamily property in Midland, Texas. At last review, this loan, along with the loan for Hawthorne House Apartments (Prospectus ID#24; 1.4% of the pool), another neighboring multifamily property, were being specially serviced for payment default since December 2021. In May 2022, loan modifications for both loans were executed, which, according to the servicer, brought both loans current, converted payments to interest only (IO), added three one-year extension options to the loans for a fully extended maturity date of November 2027, and funded an all-purpose reserve of approximately $100,000 for both loans. Both loans were subsequently transferred back to the Master Servicer in November 2023.

The subject property has struggled with volatility in the past, which can be attributed in part to the Midland region's reliance on the oil and gas industry. While the occupancy rate at the subject has remained over 90% for the last three years, rental rate fluctuation caused significant downward pressure on cash flow. At issuance, the average rental rate per month was over $1,200, which dropped to approximately $732 in 2021 and rebounded to $961 in 2023. The DSCR as of YE2022 was reported at 0.60x compared with the DSCR of 0.71x at YE2021. Significant improvements were seen in 2023, primarily in average monthly rental rates, which increased by 18.9% over the prior year, with the loan covering at a DSCR of 1.1x. While these improvements are a positive sign, the loan's performance remains well below issuance expectations and the subject's performance continues to lag behind its pre-pandemic metrics. There has been no updated appraisal since February 2022, when the value declined to $16.0 million from $34.0 million at issuance. As a full recovery is still far from materializing and market volatility remains a concern, Morningstar DBRS maintained its approach, stressing the loan-to-value (LTV) ratio and applying a probability of default (POD) penalty in its analysis, resulting in an expected loss (EL) that was more than triple the pool average EL.

In this review, Morningstar DBRS identified eight loans, representing 23.5% of the pool as being at elevated refinance risk as a result of concerns about performance, rollover risk, and/or market-related concerns, as each of these loans approach maturity in H1 2025. The WA EL for these loans was nearly twice the WA pool EL.

The largest of these loans is secured by Fairfax Corner (Prospectus ID#3; 6.2% of the pool) a 182,331 square foot (sf) open-air mixed-use retail/office space across 10 buildings in Fairfax, Virginia. The collateral is situated in a larger development (non-collateral) of outdoor retail and office space that totals approximately 900,000 sf. At last review, Morningstar DBRS highlighted concerns regarding rollover, which at the time was approximately 30%, and the resulting possibility of decline in net cash flow (NCF) coupled with a challenged submarket. These concerns have largely persisted with this review. According to the financials for the trailing nine-month period ended September 30, 2023, the annualized NCF was $3.8 million compared with the YE2022 NCF of $4.6 million. This decline can be attributed largely to the decreased rental income as a result of several tenants vacating at their lease expirations. However, the borrower has been successful in improving the occupancy rate, which was reported at 96% as of the December 2023 rent roll. While the improvement in occupancy is notable, tenants representing approximately 21.3% of the net rentable area (NRA) have lease expirations prior to the loan's maturity in June 2025. In addition, according to the Q1 2024 Reis report, the Fair Oaks office submarket continues to report an elevated vacancy rate of 28.9% for, which is expected to remain elevated though 2029. Overall, given the declining NCF and high tenant rollover ahead of loan maturity, Morningstar DBRS applied a stressed LTV ratio and POD penalty in its analysis, resulting in an EL that is more than 20% greater than the pool average.

At issuance, Morningstar DBRS shadow-rated the 32 Old Slip Fee loan (Prospectus ID#2; 7.8% of the pool) as investment grade. With this review, Morningstar DBRS confirmed that the performance of this loan remains consistent with investment-grade loan characteristics. Despite concerns surrounding the office sector, the loan continues to benefit from the substantial investment of $69.0 million made by the property owner of the improvements prior to issuance that have maintained the property's high quality. The loan benefits from the structure of the ground lease: in the event of a default the improvements can revert to the borrower if the ground lessee were to stop making ground-rent payments.

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

Classes X-A, X-B, and X-FG are 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 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.

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)/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 (April 15, 2024), https://dbrs.morningstar.com/research/431205/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].