Morningstar DBRS Confirms Credit Ratings on All Classes of COMM 2015-LC19 Mortgage Trust, Changes Trends to Negative From Stable on Three Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-LC19 issued by COMM 2015-LC19 Mortgage Trust as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 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 (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class PEZ at A (high) (sf)
-- Class X-C at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class G at B (low) (sf)

Morningstar DBRS changed the trends on Classes E, F, and G to Negative from Stable. All remaining trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction as exhibited by a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.2 times (x) based on the most recent financial reporting available. In addition, the transaction continues to benefit from increased credit support to the bonds as a result of scheduled amortization, loan repayments, and defeasance. The Negative trends assigned to the Class E, F, and G certificates reflect the transaction’s exposure to a select number of loans (representing approximately 27.0% of the pool) that Morningstar DBRS has identified as being at increased risk of maturity default given recent performance challenges, weakening submarket fundamentals, and unfavourable lending conditions for certain property types. For these loans, Morningstar DBRS applied an elevated probability of default (POD) penalty and/or loan-to-value ratio (LTV), resulting in a WA expected loss (EL) that is approximately 60.0% greater than the pool’s average EL. Additionally, the transaction is in wind-down, with the majority of loans scheduled to mature within the next 12 months.

As of the June 2024 remittance, 50 of the original 59 loans remain in the pool, with a trust balance of $1.06 billion, representing a collateral reduction of 25.5% since issuance. To date, the trust has incurred approximately $6.0 million of losses, which have been contained to the nonrated Class H certificate. Twenty-nine loans, representing 59.9% of the pool balance, are on the servicer’s watchlist; however, only 15 of those loans, representing 23.3% of the pool balance, are being monitored for performance-related reasons. In addition, only one small loan, representing 0.7% of the pool balance, is in special servicing and 14 loans, representing 19.9% of the pool balance are fully defeased. Since Morningstar DBRS’ prior rating action, the pool’s former largest loan, One Memorial (Prospectus ID#1; formerly 12.0% of the pool) has repaid in full.

Central Plaza (Prospectus ID#4; representing 6.9% of the pool) is secured by the borrower’s fee-simple interest in four Class B office buildings totaling 880,035 square feet (sf) in Los Angeles. The annualized net cash flow (NCF) based on the year-end (YE) 2023 financials was $8.0 million (reflecting a DSCR of 1.4x), compared with $8.5 million at YE2022 and $8.3 million at issuance. While financial performance remains in line with issuance, the collateral has historically experienced higher-than-average vacancy. The property is currently 51.2% occupied (with an average rental rate of $29.8 per square foot (psf)), down from 64.2% at issuance. According to Reis, the Q1 2024 Mid-Wilshire submarket vacancy rate and average asking rental rate was 23.30% and $39.5 psf, respectively. No updated appraisal has been provided since issuance, when the property was valued at $141.3 million; however, given the low occupancy rate and general challenges for office properties in today’s environment, Morningstar DBRS notes that the collateral’s as-is value has likely declined significantly, elevating the credit risk to the trust. As a result, Morningstar DBRS applied a stressed LTV ratio and increased the POD in its analysis, resulting in an EL that was approximately 90.0% higher than the pool average.

The second-largest loan on the servicer’s watchlist, Decorative Center of Houston (Prospectus ID#8, 4.2% of the pool), is secured by a 514,000 sf mixed-use property comprising primarily office and unique showroom space in Houston. The first phase of the center was constructed in 1974 and consisted of three separate two-story buildings to be used exclusively for showroom purposes. In 1984, a ten-story glass tower that connects the three original buildings through its lobby was constructed. Currently, floors five through ten of the tower (approximately 43.0% of net rentable area (NRA)) are used as office space, while the lower floors and the attached buildings serve as showroom space. Occupancy and cash flow at the property have declined year over year (YOY) to just 58.5% and $3.0 million as of the YE2023 financials, down from 65.0% and $3.3 million at YE2022 and 78.0% and $4.2 million at issuance, respectively. Over the next 12 months, 25 tenants, representing 19.0% of the NRA, have leases that are scheduled to roll; however, the rent roll is relatively granular, partially mitigating some of the downside risk. As a result of the loan’s upcoming maturity in January 2025 and the underlying collateral’s downward trending operating performance, Morningstar DBRS adjusted the LTV and POD in its analysis, resulting in an EL that was more than three times greater than the pool average.

The sole specially serviced loan, 56-15 Northern Boulevard (Prospectus ID#34, 0.7% of the pool), is secured by a 24,500 sf retail property in Woodside, New York. The loan transferred to special servicing in January 2020 for maturity default and is delinquent, having last paid in March 2020. A receiver was appointed in November 2023. The servicer noted that the workout strategy is to evaluate a foreclosure sale once property operations are stabilized in receivership, while concurrently evaluating other resolution strategies that could include, but are not limited to, a note sale and a discounted payoff of the loan. The property was historically occupied by two tenants, La Boom (51.0% of NRA; on a month-to-month lease) and Argonaut Holdings LLC (47.0% of NRA; lease expiration in March 2024). Argonaut Holdings LLC (which formerly operated a Volkswagen dealership at the property) appears to have vacated the property; however, an online search suggests the space has been backfilled by Empire Cadillac of Long Island City. Morningstar DBRS has reached out to the servicer for confirmation. The property was reappraised in January 2024 for $11.7 million, below the February 2023 appraised value of $12.7 million and the issuance appraised value of $13.0 million. In its analysis, Morningstar DBRS liquidated the loan based on a haircut to the most recent value, resulting in an implied loss severity in excess of 60.0%.

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

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

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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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)

-- Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

-- Morningstar DBRS 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 DBRS Morningstar analyses 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].