Morningstar DBRS Changes Trends on Three Classes of COMM 2014-LC17 Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC17 issued by COMM 2014-LC17 Mortgage Trust as follows:
 
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class PEZ at A (high) (sf)
-- Class X-C at BB (high) (sf)
-- Class D at BB (sf)
-- Class E at B (low) (sf)
-- Class F at CCC (sf)
-- Class G at C (sf)
 
Class A-SB was discontinued with this review as it was repaid in full with the June 2024 remittance.

Morningstar DBRS changed the trends on Classes D, X-C, and E from Stable to Negative with this review. The change in trends is a result of nine loans that Morningstar DBRS has identified as having an elevated refinance risk evidenced by notable gap financing issues ahead of the respective maturity dates in 2024, as further described below. All remaining trends are Stable with the exception of Classes F and G, which have ratings that do not typically carry a trend in commercial mortgage backed securities (CMBS) credit ratings. The rating confirmations and Stable trends reflect pool performance and loss expectations that remain in line with Morningstar DBRS' expectations at the time of the last rating action. Since the last credit rating action in July 2023, nine loans have repaid in full, contributing approximately $95 million in principal paydown, and one loan was liquidated at a better-than-expected recovery. To date, eight loans have been liquidated from the trust with a cumulative realized loss of approximately $32.6 million. Additionally, there has been a new defeasance of approximately $53.5 million, bringing the total defeased collateral to 23.7% of the pool. As of the June 2024 remittance, 39 of the original 71 loans remain in the pool, with an aggregate principal balance of $642.5 million, representing a collateral reduction of 48.0% since issuance.

The vast majority of the remaining loans in the pool are scheduled to mature by YE2024. In a wind-down scenario, Morningstar DBRS expects that the majority of non-specially serviced loans will successfully repay at maturity as evidenced by a weighted-average (WA) debt service coverage ratio (DSCR) of 1.73 times (x) for all remaining loans in the pool. However, Morningstar DBRS has identified several loans that exhibit increased maturity default risk given weak credit metrics. To account for this, Morningstar DBRS' analysis included stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs) for nine of loans, representing 23% of the pool, to increase the expected loss (EL) as applicable. The resulting WA EL for these loans was approximately double the pool's WA EL.

There are 27 loans (71.8% of the pool) on the servicer's watchlist, all of which have been flagged for upcoming maturities within the next six months. However, only four (9.8% of the pool) of these are being monitored for additional performance related concerns. There are two loans (2.3% of the pool) in special servicing, both of which were also in special servicing at the time of the last rating action. In its analysis for this review, Morningstar DBRS maintained its liquidation of the two loans in special servicing.

The largest specially serviced loan, Paradise Valley (Prospectus ID#26; 2.0% of the pool), is secured by an 87,000-square-foot retail center in Phoenix. The loan transferred to the special servicer in August 2020 for imminent payment default and became real estate owned in December 2021. Following a significant increase in vacancy, the borrower attempted to modify and reinstate the loan, but ultimately decided to return the asset to the trust through a nonjudicial foreclosure. As of the March 2024 rent roll, the subject property is 77.8% occupied, up from 45% at YE2022. The improvement reflects a new lease to Influence Gymnastics (35.3% of the net rentable area (NRA), lease expiry in December 2034). Additionally, the servicer commentary indicates that an existing tenant Chainco, LLC (2.1% of the NRA, lease expiry in August 2024), which operates as a martial arts school, will be expanding to more than double its current footprint, and an additional lease for approximately 6.0% of the NRA is nearing execution. Per the YE2023 financials, expenses exceeded revenue and the loan reported a debt service coverage ratio (DSCR) of -0.44x compared with the YE2022 DSCR of 0.53x. However, following the increase in occupancy over the prior year Morningstar DBRS expects revenue will improve. An updated appraisal dated March 2024 reflects this, with the property now valued at $18.9 million, compared with the December 2022 appraised value of $12.6 million. In its analysis for this review, Morningstar DBRS liquidated this loan from the trust with an implied loss severity approaching 20.0%, based on a stress to the most recent appraised value.

Excluding collateral that has been defeased, the pool is most concentrated by loans that are secured by lodging and office properties, representing 30.4% and 15.3% of the pool balance, respectively. Most of the loans secured by office properties in this transaction continue to perform as expected, based on the most recent financials available. However, Morningstar DBRS has a cautious outlook on this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords' efforts to backfill vacant space, and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, Morningstar DBRS increased the POD penalties, and, in certain cases, applied stressed LTVs for loans that are secured by office properties.

The largest loan on the servicer's watchlist flagged for performance related concerns -- and one of the loans Morningstar DBRS identified as a risk for maturity default -- is Aloft Cupertino (Prospectus ID#6; 4.8% of the pool). The loan is secured by a 123-key, limited-service hotel in Cupertino, California. The subject is located approximately a half-mile from Apple's 1 Infinite Loop office. The loan was placed on the servicer's watchlist in July 2022 for a low DSCR following a period in special servicing and is now flagged for its upcoming loan maturity in August 2024. The loan previously received a modification with terms that included retroactively deferring principal and interest payments for six months; converting the loan to interest-only (IO) thereafter for 12 months; and deferring of furniture, fixtures, and equipment reserve deposits through June 2022, with all deferred amounts to be repaid prior to maturity in June 2024.

Per the December 2023 operating statement, occupancy and revenue per available room have declined year over year. The loan reported a YE2023 DSCR of 0.66x, reflecting a debt yield of 5.2%, compared with the YE2022 DSCR of 0.95x. The borrower has been contacted about its upcoming maturity date, however, it has not provided an update. The decline in cash flow and limited amortization since the loan's modification may present a challenge to efforts to refinance the loan. To reflect this concern, Morningstar DBRS analyzed this loan with an elevated POD, increasing the loan's EL to approximately double the WA pool EL.

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, and X-C 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 ratings assigned to Classes C and PEZ materially deviate from the credit ratings implied by the predictive model. 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. The transaction is in wind down and the vast majority of the remaining loans in the pool have an upcoming maturity in 2024 and as loans pay off Morningstar DBRS considers adverse selection as the challenged loans will remain in the pool, supporting the material deviations.

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.

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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

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].