Morningstar DBRS Downgrades Credit Ratings on Eight Classes of Morgan Stanley Capital I Trust 2014-150E, Changes Trend on Six Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2014-150E issued by Morgan Stanley Capital I Trust 2014-150E as follows:

-- Class A to A (sf) from AA (sf)
-- Class A-S to BBB (sf) from A (high) (sf)
-- Class X-A to BBB (sf) from AA (low) (sf)
-- Class X-B to BB (sf) from A (sf)
-- Class B to BB (sf) from A (low) (sf)
-- Class C to B (sf) from BBB (low) (sf)
-- Class D to CCC (sf) from B (high) (sf)
-- Class E to CCC (sf) from B (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class F at CCC (sf)
-- Class G at CCC (sf)

The trend on all classes of notes is Negative, with the exception of Classes D, E, F, and G as the credit ratings on these notes do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions. Morningstar DBRS also removed all credit ratings from Under Review with Negative Implications, where they were placed on April 15, 2024, as part of Morningstar DBRS' review of transactions secured by office properties within its North American CMBS single-asset/single-borrower (NA CMBS SASB) portfolio. Morningstar DBRS' view that a shift in the use and demand for office space has been observed in the last few years prompted the review. Amid an increase in remote work and hybrid schedules, tenant demand in urban markets, such as those most frequently represented in the NA CMBS SASB space, has been the most resilient for higher-quality buildings that offer extensive amenity packages and are in areas with proximity to transportation hubs and other nearby draws for commuters and city dwellers alike. Morningstar DBRS expects these trends to be sustained for the long term and the ripple effects in increased tenant improvement costs, capital improvement expectations, and decreased demand for some markets and neighborhoods will continue to influence investment activity for the office sector as a whole. For more information regarding the approach and analysis conducted, please refer to the press release, "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties" published on April 15, 2024.

At the conclusion of the April 2024 review, several transactions, including the subject transaction, remained Under Review with Negative Implications. This generally reflected the existence of evolving factors for those respective credits for which Morningstar DBRS identified a need for more information to be gathered to inform the analysis. With this review for the subject transaction, Morningstar DBRS has resolved the Under Review with Negative Implications status. A full detail of the credit rating actions and credit ratings rationale are outlined, below.

The credit rating downgrades are reflective of Morningstar DBRS' increased loss expectations for the loan, following a deterioration in the Morningstar DBRS value which is driven by declining occupancy, submarket concerns and increased refinance risk. As part of its analysis, Morningstar DBRS derived an updated value of $396.7 million, a 21.6% decline from the previous Morningstar DBRS value of $506.3 million derived in 2020. The loan is scheduled to mature in September 2024 and given net cash flow (NCF) is down over 15.0% since issuance and with additional concentrated rollover risk in the near to medium term, Morningstar DBRS believes a full payoff of the loan is unlikely. Given these factors, Morningstar DBRS used a liquidation scenario to determine recoverability. The downgrade of Classes D and E reflect Morningstar DBRS' loss projections and the downgrade of Classes A through C reflect the expected deterioration of credit support. As noted above, Morningstar DBRS also changed the trends on Classes A through C to Negative, reflective of the potential for further value and credit deterioration in a default scenario, where the resolution timeline may be extended.

The $525.0 million transaction is secured by the leasehold interest and sub-leasehold interest in 150 East 42nd Street, a 42-story Class A office tower totaling 1.7 million square feet (sf) located directly across from Grand Central Terminal. The total debt stack of $700 million includes a $175 million mezzanine loan that is co-terminus with the trust's interest-only (IO) 10-year loan. The ground lease expires in 2113, and the borrower sub-ground leases the entire parcel to a condominium board, which created a 47-unit condominium, with the sub-ground lease expiring in 2046. Currently, the borrower is paying an annual ground rent payment of $22.0 million, a figure that will increase to $24.0 million in 2025.

According to the March 2024 rent roll, the property was 89.2% occupied with an average rental rate of $55.89 per sf (psf) The property has historically benefitted from stable, investment-grade tenancy from its two largest tenants, Wells Fargo Bank, Ltd (Wells Fargo) (27.0% of net rentable area (NRA), lease expires December 2028) and The Mount Sinai Hospital (26.3% of NRA, lease expires March 2046); however, various news articles in November 2023 reported that Wells Fargo signed a lease at 30 Hudson Yards, expanding its current footprint at that property, and will aim to move into its new space by the end of 2026. Wells Fargo's lease does not contain any termination options and Morningstar DBRS confirmed with the servicer that Wells Fargo remains in occupancy at the subject and is not subleasing any of its space as of June 2024. In addition to Wells Fargo, the property's third largest tenant, Dentsu International (Dentsu) (12.1% of NRA, lease expires December 2028), may be consolidating its space as they are currently only using approximately half of their leased square footage. Dentsu's lease does not contain any termination options and the tenant is not subleasing any space as of June 2024. Both Wells Fargo and Dentsu currently pay rentals rates which are in line with the Grand Central submarket average effective rental rate of $57.92 psf, according to Reis. Although occupancy has generally remained stable since issuance, NCF declined 16.7% from issuance levels, driven by an increase in operating expenses. The increase in operating expenses is mainly attributable to higher insurance premiums, ground rent increasing $2.0 million to $22.0 million, and higher payroll and janitorial expenses.

Morningstar DBRS had previously concluded to a value of $506.3 million for the subject property, which was based on the Morningstar DBRS NCF of $40.3 million and a 7.97% leasehold cap rate (implied based on a fee-simple cap rate of 6.75% for the property). With this review, Morningstar DBRS increased the fee-simple cap rate to 7.25% to reflect increased availability in the market and tightening liquidity for office properties in general. The Morningstar DBRS fee-simple cap rate of 7.25% implies a leasehold cap rate of 10.17%, resulting in an updated value of $396.7 million for the subject. Morningstar DBRS' analysis for this review focused on a recoverability scenario for the loan given its upcoming maturity and rollover. In an event of default, based on the trust amount of $525.0 million, a 1.0% liquidation fee, and one year of principal and interest advances, the total trust exposure could reach approximately $553.1 million. In its analysis, Morningstar DBRS gave credit to the loan's total reserves of $15.9 million as of the June 2024 remittance. The result of the liquidation scenario suggested losses that would fully reduce the balance of Classes E, F, and G and more than half of Class D.
Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 and X-B are IO certificates that reference 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 info-DBRS@morningstar.com.

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.

The credit ratings of this transaction are highly subject to the asset's liquidation value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed. 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 Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799
-- 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 (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.