Morningstar DBRS Confirms Credit Ratings on All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C17, Changes Trend on One Class to Negative from Stable

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-C17 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2014-C17 as follows:

-- Class A-5 at AAA (sf)
-- Class A-S 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 PST at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at CCC (sf)

The trend on Class D was changed to Negative from Stable. Class E has a credit rating that does not typically carry trends in commercial mortgage-backed securities (CMBS). All other trends are Stable.

The credit rating confirmations and Stable trends reflect the overall performance of the transaction, supported by the increased credit enhancement provided to the certificates as a result of the successful repayment of 19 loans totaling $352.7 million since last review in June 2023 and the majority of loans, which are exhibiting healthy performance metrics with a healthy weighted-average (WA) pool debt service coverage ratio (DSCR) of 1.84 times (x), excluding defeasance (4.9% of the pool). However, the Negative trend reflects the challenges for the pool, including three loans (11.8% of the pool) in special servicing and six loans (24.9% of the pool) that that Morningstar DBRS expects will face increased refinance risk as a result of performance declines, increased tenant rollover risk, and/or general market concerns, with all remaining loans scheduled to mature in the next four months.

According to the May 2024 reporting, 32 of the original 67 loans remain in the pool, with an aggregate principal balance of $283.3 million, reflecting a collateral reduction of 34% since last review and 72.7% since issuance, as a result of scheduled loan amortization, loan repayment and three loan liquidations. The largest liquidation from the trust was the Holiday Inn Houston Intercontinental, previously 2.9% of the pool, which was liquidated with the September 2023 reporting at a realized loss of approximately $18.6 million, a portion of which affected Class F. In its analysis for this review, Morningstar DBRS liquidated one of the three specially serviced loans, which was real estate owned (REO), resulting in an implied loss of $5.3 million that would also be contained to Class F. There are 21 loans, representing 75.7% of the pool, on the servicer’s watchlist for upcoming maturity, of which only two have second trigger codes for upcoming tenant rollover risk and deferred maintenance.

Morningstar DBRS also projected updated valuations for loans with elevated refinance risk, a number of which indicated value deficiencies as the loans approach their respective maturities, resulting in an increased credit risk for Class E and supporting the Negative trend. Where applicable, Morningstar DBRS increased the probability of default penalties (POD) and/or increased loan-to-value ratios (LTVs) to reflect the increased risk of maturity default. These adjusted loans had a WA expected loss that was more than 1.5x the pool’s WA expected loss.

The largest loan with elevated refinance risk that Morningstar DBRS has concerns about is also the largest loan in special servicing. The Holiday Inn Center City Charlotte (Prospectus ID#12; 7.2% of the pool) is secured by a 294-room full- service hotel in Charlotte, North Carolina. Since issuance, the hotel had operated under the Holiday Inn flag (owned by InterContinental Hotel Group (IHG)), however, the franchise agreement ended in November 2023 and it appears the property is now operating under a DoubleTree (owned by Hilton Worldwide Holdings Inc.) flag. The loan transferred to the special servicer in April 2024 as a result of imminent maturity default with the loan’s scheduled maturity in July 2024. The workout strategy is still unclear as the servicer is evaluating the next steps.

The loan’s transfer followed a substantial performance decline in 2023 with the DSCR reported at 0.98x in YE2023, down from 1.57x in YE2022 but in line with pre-pandemic and issuance figures. The decline has been a result of both a drop departmental revenue and an increase operating expenses; however, room revenue and food and beverage revenue remain stable, despite the increase in supply in the market over the last several years. As of YE2023, other departmental revenue dropped by nearly $0.5 million year over year, which, along with the increased expenses, contributed to an elevated operating expense ratio of 75%, above the previous year’s figure of just 66%. According to the YE2023 STR, the subject reported occupancy rate, average daily rate, and revenue per available room (RevPAR) figures of 57.3%, $146, and $84, respectively, which were in line with 2022 figures, but below the pre-pandemic figures of 71.7%, $143, and $103 for the trailing 12 months ended March 30, 2018. Based on the same reporting, the hotel had a RevPAR penetration rate of only 75.2%, a decrease from the previous year’s rate of 86.2%, highlighting the subject’s decline in popularity.

As noted above, the hotel recently began operating under a DoubleTree flag and, according to the property’s website, the borrower has refreshed the property in line with brand standards that, as a premium brand, should help to improve the subject’s competitive appeal. While Morningstar DBRS anticipates the borrower will face some difficulties in refinancing given the recent decline in performance, which will likely have an effect on the property’s value, the loan has been maintained current to date, and it appears the borrower has recently invested into the property, which should help improve future performance. This loan was analyzed with an elevated POD, resulting in an expected loss (EL) that was nearly 1.5x the pool’s WA EL.

The second-largest loan in special servicing is secured by Arrowhead Professional Park (Prospectus ID#33; 3.0% of the pool), a 40,000 square foot (sf), Class B medical office property in Glendale, Arizona. The loan is secured by the only office property remaining in the pool and transferred to special servicing in November 2020 for monetary default following the departure of Arrowhead Health Center (formerly 54% of the NRA) in July 2018. Ultimately, the loan was foreclosed and became REO in April 2022, following several years when the borrower was unable to backfill any substantial portions of space. Occupancy has remained distressed since the loan’s transfer and was reported at 20% as of June 2023.

An updated September 2023 appraisal valued the property at $7.4 million, down from previous valuations of $7.9 million, $8.4 million, and $13.1 million in January 2023, May 2022, and at issuance, respectively. According to Reis, the Northwest submarket of Phoenix has reported a vacancy rate above 20% for the past three years and it is expected to remain elevated through 2029. Given the poor occupancy, soft submarket, and decreasing investor appetite for the property type, Morningstar DBRS liquidated the loan, taking a haircut to the September 2023 appraised value, resulting in a loss severity in excess of 60%.

At issuance, Morningstar DBRS shadow-rated the Courtyard King Kamehameha’s Kona Beach Hotel Leased Fee loan (Prospectus ID#6; 13.1% of the pool) as investment grade. With this review, DBRS Morningstar confirms that the performance of the loan remains consistent with investment-grade loan characteristics.

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 and X-B 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.

Morningstar DBRS materially deviated from its predictive model when determining the credit ratings assigned to Classes B, C, and PST by assigning credit ratings that were lower than the implied results. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan level event risk specifically tied to the specially serviced loans, as well as loans exhibiting increased refinance risk as the pool is in wind down.

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 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
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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].