Morningstar DBRS Downgrades Credit Ratings on Four Classes of COMM 2014-CCRE14 Mortgage Trust, Changes Trend on Three Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded the following classes of COMM 2014-CCRE14 Mortgage Trust as follows:

-- Class C to BBB (low) (sf) from A (low) (sf)
-- Class PEZ to BBB (low) from A (low) (sf)
-- Class D to CCC (sf) from BB (high) (sf)
-- Class E to C (sf) from CCC (sf)

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

-- Class B at AA (sf)
-- Class F at C (sf)

Morningstar DBRS changed the trends on Classes B, C, and PEZ to Negative from Stable. Classes D, E, and F are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

Since the last credit rating action, 34 loans have repaid from the trust, with seven loans outstanding, all of which are in special servicing and flagged for maturity default. As such, Morningstar DBRS analyzed the loans based on a liquidation and recoverability analysis.

The credit rating downgrades and Negative trends reflect the increased loss projections upon resolution of the remaining loans, with the largest losses stemming from the second- and third-largest loans, 175 West Jackson (Prospectus ID#8, 17.7% of the pool) and 16530 Ventura Boulevard (Prospectus ID#20, 8.7% of the pool), both of which are secured by office properties. Total losses of $54.4 million would erode the entirety of the unrated Class G and Class F balances and approximately 90.0% of the Class E balance, supporting the credit rating downgrades with this review.

Additionally, Morningstar DBRS’ credit ratings are constrained by Morningstar DBRS expectations of accruing interest shortfalls prior to loan resolution, which also contributed to the trend change to Negative for Classes B and C. Interest shortfalls have increased to $7.0 million with the June 2024 remittance, up from $4.7 million at the last credit rating action. Shortfalls have accumulated up to Class D for over six remittance cycles, which exceeds the Morningstar DBRS tolerance for unpaid interest at the BB rating category, therefore further supporting the credit rating downgrades. Considering all loans are in special servicing and updated appraisals are being made available with values that are generally trending downwards, the borrower’s ability to pay interest on the senior debt and the servicer’s continued advancing of interest has likely to diminish, potentially leaving Classes B and C exposed to future interest shortfalls, supporting the Negative trends.

The credit rating confirmations on the remaining classes reflect the recoverability expectations for the largest loan in the pool, 625 Madison (Prospectus ID#1, 47.2% of the pool), a pari passu loan that is also secured in the COMM 2014-CCRE15 Mortgage Trust transaction (rated by Morningstar DBRS). The loan is secured by the leased-fee interest in the land under 625 Madison Avenue, a 17-storey Class A office tower in Manhattan.

SL Green (SLG) was the ground-lease tenant and owned the improvements; however, due to a dispute between SLG and the loan sponsor, Ben Ashkenazy, SLG foreclosed on Ashkenazy’s interest in the land after he defaulted on a $195.0 million mezzanine loan (which SLG owns a stake in).

The senior loan was modified in December 2023 to extend the loan to December 2026, terminate the ground lease, and pre-approve an equity transfer. A $25.0 million principal paydown was made in connection with the modification. Based on several news articles, ownership of the leased fee interest was transferred to Ross Related Companies with SLG having a $234.5 million equity as well. The plan is to demolish the office building and construct a new tower that would include hotel, retail, and condo space.

Based on the November 2023 appraisal, the value of the land was reported at $415.1 million, an increase from the $400.0 million appraised value at issuance, and well above the current whole-loan balance of $168.9 million. As such, the loan is likely to be recovered, therefore supporting the credit rating confirmations.

The largest contributor to the projected losses is the 175 West Jackson loan, which is secured by a 22-story, 1.54 million-square-foot (sf) office tower in Chicago’s central business district. The loan failed to repay at its November 2023 maturity and workout discussions are currently ongoing. Occupancy at the subject has been depressed for the last several years with the trailing 12-month period ended March 31, 2024, financials reporting an occupancy rate of 58.0% and a debt service coverage ratio below breakeven. Reis reports an average vacancy rate of 14.4% for office properties located in the Central Loop submarket as of Q1 2024, compared with the Q1 2023 figure of 14.2%. The March 2024 appraisal reported a value of $120.0 million, a significant decline from the December 2022 value of $195.0 million and the whole-loan balance of $250.5 million. Given the steep value decline and soft office submarket fundamentals, the loan was analyzed with a liquidation scenario based on a stressed haircut to the March 2024 value, resulting in a loss severity approaching 70.0%.

The 16530 Ventura Boulevard loan is secured by the Encino Atrium, a 157,000-sf suburban office building located in Encino, California. The loan recently transferred to special servicing as the borrower failed to pay off the loan at the January 2024 maturity. Although a resolution strategy has yet to be determined, the borrower is working towards upgrading common areas and interior meeting spaces in order to attract new tenants. Occupancy has been depressed for the last several years with the year-end 2023 financials reporting an occupancy rate of 42.1% and negative cash flows. In comparison, The SFV – Central submarket reported an average vacancy rate of 17.2% for Q1 2024 as per Reis. An appraisal dated February 2024 valued the property at $4.3 million, a significant decline from the issuance appraised value of $30.0 million and well below the loan amount of $17.6 million. Given the significant decline in value and soft submarket performance, the loan was analyzed with a full loss to the loan.

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

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
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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)

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. (July 17, 2023)

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