Morningstar DBRS Downgrades Credit Ratings on Five Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2015-C27

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C27 as follows:
 
-- Class X-E to BB (sf) from BBB (sf)
-- Class E to BB (low) (sf) from BBB (low) (sf)
-- Class X-F to CCC (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (high) (sf)
-- Class G to C (sf) from CCC (sf)
 
In addition, Morningstar DBRS confirmed the following credit ratings:
 
-- 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 (low) (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class H at C (sf)
 
The Negative trends on Classes D, E, X-D, and X-E were maintained by Morningstar DBRS, as were the Stable trends on Classes A3, A4, ASB, AS, B, C, X-A, and X-B. Classes F, G, H, and X-F have credit ratings that do not typically carry trends in commercial mortgage backed securities (CMBS).

The credit ratings downgrades reflect increased loss projections for the two loans in special servicing: Herald Center (Prospectus ID#6, 5.8% of the pool) and Granite 190 (Prospectus ID#5, 5.7% of the pool). Morningstar DBRS received updated appraisals for bothassets, indicating greater-than-expected declines in value. With this review, Morningstar DBRS considered a liquidation scenario for both loans, resulting in total implied losses of over $25.0 million, which would fully erode the nonrated Class J and C (sf) rated Class H certificate, and partially erode the C (sf) rated Class G certificate.

The Negative trends on Classes D, E, X-D, and X-E reflect Morningstar DBRS' concerns with increased maturity default risk as the pool enters its maturity year. Nearly all the outstanding loans are scheduled to mature in the next 12-18 months. While Morningstar DBRS expects the majority of these loans will repay at maturity, five loans, representing 27.8% of the pool, have been identified as exhibiting increased maturity default risk given weak credit metrics and decreased tenant demand, which have likely eroded property values. Morningstar DBRS stressed these loans with an elevated probability of default (POD) penalty and/or loan-to-value ratio (LTV) to reflect the risk of maturity default, resulting in a weighted-average (WA) expected loss (EL) that was 35% higher than the pool average.

As of the May 2024 remittance, 49 of the original 55 loans remain in the pool, with a trust balance of $660.7 million representing a collateral reduction of 19.7% from issuance. Ten loans representing 9.2% of the pool balance are fully defeased. Excluding defeased loans, the pool is well diversified by property type with mixed-use, retail, and multifamily properties comprising 20.1%, 20.0%, and 18.8% of the pool, respectively. There are only four loans representing 9.3% of the pool backed by office properties. As noted above, two loans, representing 11.5% of the pool, are specially serviced.

The largest contributor to Morningstar DBRS' projected liquidated losses is Granite 190 (Prospectus ID#5, 5.7% of the pool), a suburban office property in the Dallas suburb of Richardson, Texas. The loan transferred to special servicing in February 2023, following two years of occupancy declines. In June 2023, the largest tenant, United Healthcare, renewed its lease for an additional three years conditional upon the return of approximately 123,000 square feet (sf) of space, effectively downsizing from 57.6% of the net rentable area (NRA) to 16.5%. In addition, the former second-largest tenant, Parson Services Corporation (14.6% of the NRA) vacated the property upon its lease expiry in March 2023. Both departures contributed to occupancy falling from 76% at YE2022 to 37.2% as of the March 2024 rent roll. The loan was ultimately foreclosed on and, in December 2023, the asset is now real estate owned (REO). An updated appraisal date June 2023 valued the property at $33.0 million, a 40% reduction from the issuance appraised value of $55.0 million. Morningstar DBRS' liquidation scenario for this loan is based on a haircut to the June 2023 appraised value given the continued occupancy decline, high submarket vacancy, and general lack of liquidity for this property type, resulting in an implied loss severity approaching 55.0%.

Herald Center (Prospectus ID#6, 5.8% of the pool) is secured by a 249,063-sf mixed-use office/retail property in the Penn Station submarket of New York City. The loan transferred to the special servicer in January 2024 for maturity default after the borrower failed to pay off the loan at its scheduled maturity. According to the servicer, the borrower and lender have entered into a forbearance agreement that has extended the maturity date to January 2025. Morningstar DBRS has inquired as to the terms of this forbearance; however, no additional information has been provided at this time.

In recent years, the property's occupancy has plummeted following the departure of its former largest tenant, ASA College (66.4% of the NRA), which vacated the property prior to its scheduled lease expiry in March 2028. The tenant's departure resulted in the property's occupancy dropping to 30% by YE2022. In the past year, the borrower has been able to execute one new lease for the Board of Electrical Engineers (22.8% of the NRA, lease expiry in 2043), which brought the property occupancy to 52.8% as of September 2023. Despite the property's low occupancy, revenue has been sufficient to cover debt service payments, largely attributable to the current largest tenant H&M (25.2% of the NRA, lease expiry in 2041), which occupies the majority of the building's retail component and represents 64.9% of the base rent. The debt service coverage ratio (DSCR) as of September 2023 was 1.32 times (x). An updated appraisal dated March 2024, valued the property at $276.0 million, a 51.7% decline from the issuance appraised value of $572.0 million. Given the decline in appraised value, and the low overall occupancy, Morningstar DBRS analyzed this loan with a liquidation scenario, based on a haircut to the March 2024 appraised value, resulting in a loss severity of over 15%.

The largest loan on the servicer's watchlist is Crowne Plaza - Hollywood, FL (Prospectus ID#2, 7.7% of the pool), secured by a 311-key full-service hotel, located along Ocean Drive in Hallandale Beach, Florida. The asset currently operates under the Hilton flag as a DoubleTree. The loan is on the servicer's watchlist because of a low DSCR, with the trailing June 2023 DSCR reported at 1.08x compared with the YE2022 DSCR of 1.18x, YE2021 DSCR of 0.78x, and Issuer's DSCR of 1.56x. Consistent with the prior review, Morningstar DBRS remains concerned with declining cash flow and increasing expenses at the subject, specifically the Real Estate Taxes and Property Insurance expenses, which have risen by 59.2% and 38.2%, respectively, since issuance. In addition, the hotel has historically underperformed its competitive set, with the March 2024 STR report indicating a RevPAR penetration rate of only 59.8% for the trailing 12-month period. Given these concerns Morningstar DBRS' analysis includes an added POD stress, resulting in an EL more than twice 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-D, X-E, and X-F 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 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.
22 West Washington Street
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)

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.

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