Morningstar DBRS Confirms Credit Ratings on All Classes of COMM 2015-PC1 Mortgage Trust, Changes Trends on Four Classes to Negative from Stable

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-PC1 issued by COMM 2015-PC1 Mortgage Trust as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M 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 X-C at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-D at BB (sf)
-- Class E at BB (low) (sf)
-- Class F at CCC (sf)

Morningstar DBRS changed the trends on Classes D, E, X-C, and X-D to Negative from Stable. The credit rating assigned to Class F does not typically carry a trend in commercial mortgaged-backed securities (CMBS) ratings. All other trends are Stable.

The Negative trends on Classes D, E, X-C, and X-D reflect the increased expected losses from the loans in special servicing in addition to Morningstar DBRS' concerns regarding increased default risk for a number of loans. Nearly all of the remaining loans in the transaction are scheduled to mature in the first half of 2025 and in a wind-down scenario, Morningstar DBRS expects that the majority of non-specially serviced loans will successfully repay at maturity. However, Morningstar DBRS has identified nine loans, representing 25.2% of the pool balance, that exhibit increased default risk because of weak credit metrics and/or upcoming rollover risk. Morningstar DBRS expects that some of these loans will default as they near their respective maturity dates. To account for the increased risk, Morningstar DBRS used stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default for these loans to increase the expected loss (EL) as applicable. Those loans resulted in a weighted average (WA) EL that is nearly 40% higher than the WA EL for the rest of the pool. Should the performance of these loans deteriorate further or additional defaults occur, Morningstar DBRS may consider credit rating downgrades on the classes with Negative trends.

Although there has been a notable uptick in the number of loans that Morningstar DBRS analyzed through a liquidation scenario, the current credit rating categories for the most junior classes are appropriately insulated. Morningstar DBRS liquidated all seven of the loans in special servicing (25.2% of the pool), resulting in a total implied loss approaching $38 million, which would erode the unrated Class G, leaving approximately $7.0 million remaining while Class F already has a credit rating that indicates very speculative credit quality, supporting the remaining credit rating confirmations.

As of the June 2024 remittance, 66 of the original 80 loans, with an aggregate principal balance of $1.0 billion, remain in the pool, representing a collateral reduction of 31.0% since issuance as a result of loan repayment and scheduled amortization. To date, losses have totaled $1.0 million, eroding only 2% of the nonrated Class G. Twenty loans are on the servicer's watchlist, representing 28.6% of the pool; however, only six of these loans are being monitored for performance-related concerns. There has been a healthy amount of defeasance within the pool with 18 loans, representing 24.1% of the pool that have fully defeased, an uptick of 6.6% since the last credit rating action. Excluding defeased loans, the three largest property-type concentrations are office (35.1% of the pool), retail (16.5% of the pool), and lodging (16.1% of the pool). Morningstar DBRS has a cautious outlook on the office asset type given the anticipated upward pressure on vacancy rates in the broader office market, challenging landlords' efforts to backfill vacant space and, in certain instances, contributing to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Morningstar DBRS' analysis includes an additional stress for select office loans exhibiting weakened performance, which resulted in a WA EL that is more than 40% higher than the pool's average EL.

The largest loan in special servicing, 760 & 800 Westchester Avenue (Prospectus ID#7, 3.0% of the pool), is secured by two Class A office properties in Rye Brook, New York. The loan is pari passu with the WFCM 2015-NXS1 (Morningstar DBRS rated) and COMM 2015-DC1 transactions. The loan was recently transferred to special servicing in April 2024 for imminent monetary default and according to the most recent servicer commentary, both the lender and the borrower have signed a pre-negotiation letter while discussions are underway.

As of the March 2024 rent roll, the combined properties were 87.3% occupied compared with 86% in YE2022 and 90% at issuance. The 760 Westchester Avenue back office totals 64,584 square feet (sf) (11.5% of the net rentable area (NRA)) and is 100% occupied by Sonic Healthcare USA, Inc. (Sonic Healthcare) on a lease expiring in October 2031. After Sonic Healthcare, the rent roll is quite granular with no tenant in the 800 Westchester Avenue building comprising more than 4.5% of the NRA. Additionally, leases comprising 17.4% of the NRA are scheduled to expire in the next 12 months. According to a Q1 2024 report from Reis, the Harrison/Rye/East office submarket reported vacancy at 26.1%, which is expected to remain elevated in the near term. As of the YE2023 financials, the net cash flow (NCF) and debt service coverage ratio (DSCR) were reported at $6.6 million and 1.06 times (x), respectively, which is above the YE2022 figures of $5.8 million and 0.93x and well below the $8.4 million NCF at issuance. Given the loan's poor historical operating performance at a relatively stable occupancy, concerns regarding upcoming rollover in a soft submarket, as well as unfavorable lending conditions as the loan approaches scheduled maturity in November 2024, Morningstar DBRS liquidated the loan by applying a haircut to the $151.0 million issuance appraised value, resulting in an implied loss severity of over 30%.

The fourth largest loan in special servicing and the largest contributor to Morningstar DBRS' liquidated loss is Gas Light Building (Prospectus ID#35, 1.3% of the pool) which is secured by a Class B office building totaling 131,727 sf in downtown Milwaukee. The loan transferred to the special servicer in November 2023 for imminent monetary default after the subject experienced significant declines in occupancy. In August 2023, the former largest tenant, U.S. Government USDA Forest (70% of the NRA, lease expired in August 2023), downsized considerably, only renewing for 8.2% of the NRA with a lease expiry in August 2026. Occupancy as of the YE2023 rent roll was reported at 39%, which is down considerably from 89% at YE2022. The special servicer is in the process of appointing a receiver while continuing to dual track. According to the most recent appraisal dated March 2024, the special servicer valued the property at $4.0 million, representing a significant 82.1% reduction in value from the $22.4 million valuation at issuance. Given the loan's considerable declines in performance and reduction in value, Morningstar DBRS analyzed this loan with a liquidation scenario, applying a haircut to the March 2024 appraisal and resulting in a loss severity approaching 85%.

Morningstar DBRS has identified the largest loan in the pool, 9000 Sunset (Prospectus ID#1, 12.4% of the pool) for elevated refinance risk ahead of its April 2025 maturity date. The loan is secured by a 145,615-sf office property in the West Hollywood neighborhood of Los Angeles. The subject's performance since issuance has been stable, reporting 96% occupancy as of the March 2024 rent roll with a YE2023 DSCR of 2.24x, which remains relatively in line with historical figures. However, according to the March 2024 rent roll, leases comprising approximately 18.5% of the NRA are scheduled to expire prior to the loan's maturity, which will likely complicate refinancing efforts. In addition, according to a Reis report from Q1 2024, the vacancy for the West Hollywood submarket was elevated at 18.7% and is expected to increase to above 20% in the next five years. Given the upcoming rollover risk, the subject's location in a soft submarket, and general concerns regarding office assets, Morningstar DBRS stressed the loan's LTV over 100% in its analysis.

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), https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, X-C, and X-D 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.

The credit ratings were 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 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

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