Morningstar DBRS Downgrades Credit Ratings on Two Classes of COMM 2014-CCRE15 Mortgage Trust, Changes Trend on Two Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-CCRE15 issued by COMM 2014-CCRE15 Mortgage Trust:

-- Class E to CCC (sf) from BB (high) (sf)
-- Class F to C (sf) from B (sf)

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

-- Class B at AA (high) (sf)
-- Class C at AA (sf)
-- Class PEZ at AA (sf)
-- Class X-B at A (low) (sf)
-- Class D at BBB (high) (sf)

Morningstar DBRS changed the trends on Classes D and X-B to Negative from Stable. All other trends are Stable, with the exception of Classes E and F, which have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

Since the last credit rating action, 26 loans have repaid from the trust and five loans are outstanding, all of which are in special servicing and flagged for either payment or 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 tied to a select number of specially serviced loans, with the largest losses stemming from 25 West 45th Street (Prospectus ID#4, 32.9% of the pool) and 600 Commonwealth (Prospectus ID#6, 16.5% of the pool), which are secured by office properties in New York and Los Angeles, respectively. Total losses of $43.8 million would erode the entirety of the unrated Class G and the majority of the Class F balance, therefore supporting the credit rating downgrades with this review. Additionally, Morningstar DBRS' credit ratings are constrained by its expectation of accruing interest shortfalls prior to loan resolution, which also contributed to the Negative trends on Classes D and X-B. Interest shortfalls are currently contained to the unrated Class G; they have increased to $2.0 million from $1.7 million at Morningstar DBRS' last credit rating action and continue to accrue at a rate of approximately $25,000 per month. Morningstar DBRS expects shortfalls to continue to accumulate at the bottom of the capital stack, with potential to affect senior classes, considering that all loans are currently specially serviced.

The credit rating confirmations on the remaining classes reflect the recoverability expectations for the largest loan in the pool, 625 Madison (Prospectus ID#3, 37.8% of the pool), a pari passu loan that is also secured in the COMM 2014-CCRE14 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-story Class A office tower in Manhattan. SL Green (SLG) was the ground-lease tenant and owned the improvements but, because of 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 (in which SLG owns a stake).

The senior loan was modified in December 2023 to extend the loan to December 2026, terminate the ground lease, and preapprove 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 Related Companies, with SLG having $234.5 million in equity. The plan is to demolish the office building and construct a new tower that would include hotel, retail, and condominium 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 loss projections is the 25 West 45th Street loan, which is secured by a 17-story Class B office tower in Manhattan's Grand Central submarket. The loan transferred to special servicing as it was unable to repay at its January 2024 maturity date. Foreclosure and appointment of a receiver are being pursued while discussions with the borrower continue. Despite the generally healthy financials with a YE2023 debt service coverage ratio (DSCR) of 1.56 times, this figure has declined as two large tenants, WeWork and FedEx (collectively representing 17.0% of net rentable area (NRA)), vacated in 2023. WeWork had terminated its lease and paid a $660,000 termination fee, but it appears that the borrower did not deposit the funds into a reserve. The property was 70.4% occupied as of the May 2024 reporting, whereas the Grand Central submarket had a vacancy figure of 12.9% for Q1 2024, as per Reis. An updated appraisal is not currently available, but Morningstar DBRS anticipates that the value has declined significantly from the issuance value of $107.0 million. As such, the loan was analyzed with a liquidation scenario and a stressed haircut to the issuance value, resulting in a loss severity in excess of 50.0%.

The 600 Commonwealth loan is secured by a 316,000-square-foot office property built in 1970 in Los Angeles. The loan transferred to special servicing as it failed to repay at its January 2024 maturity date. A loan modification to allow an extension of the loan term is currently in the approval stage. According to the YE2023 financials, the DSCR dropped well below breakeven as occupancy declined to 38.0% at YE2023 from 64.0% at YE2022. Only one tenant, LA County Department of Health Services, representing 38.0% of NRA, remained at the property. According to the February 2024 appraisal, the subject was valued at $31.4 million, a significant drop from the issuance value of $50.0 million. For this review, the loan was analyzed with a liquidation scenario, resulting in a loss severity of 30.0%.

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.

Class X-B is an interest-only (IO) certificate that references 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 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 version 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.

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