Morningstar DBRS Confirms All Classes of Banc of America Merrill Lynch Commercial Mortgage Trust 2015-UBS7, Changes Trends on Five Classes to Negative From Stable

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-UBS7 issued by Banc of America Merrill Lynch Commercial Mortgage Trust 2015-UBS7 as follows:

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

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

The credit rating confirmations reflect the overall stable performance of the pool as exhibited by a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.10 times (x) based on the most recent year-end financials. However, Morningstar DBRS notes increased concerns related to loan level performance declines and/or large tenant exposure as the pool enters its maturity year in 2025. The primary loans of concern are further discussed below. In addition, the pool is concentrated by property type with more than 25.0% of the pool balance secured by office properties. Morningstar DBRS has a cautious outlook on this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords' efforts to backfill vacant space and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties and, in certain cases, applied stressed loan-to-value ratios (LTVs) for office-backed and other loans exhibiting performance concerns. To date, $19.4 million of losses have been realized in the trust, eroding the majority of the nonrated Class H balance. In addition, $2.5 million of interest shortfalls have accrued to date, a slight increase from the prior year of $2.4 million. These factors all contributed to the Negative trends.

As of the July 2024 remittance, 37 of the original 42 loans remain in the pool, representing a collateral reduction of 24.4% since issuance. Seven loans, representing 8.3% of the pool balance, are fully defeased. Seven other loans, representing 15.5% of the pool balance, are on the servicer's watchlist and one loan, representing 3.0% is in special servicing. The Holiday Inn - New York JFK (Prospectus ID#8; 3.0% of the pool) loan is secured by a 201-key full-service hotel, located close to JFK Airport. This loan transferred to special servicing in March 2024 for nonmonetary default as the borrower was noncompliant with the franchise agreement. The hotel ultimately lost its flag and is currently contracted by the NYC Department of Homeless Services to provide temporary housing assistance for the homeless. However, it appears the property has permanently closed. The loan was last paid in April 2024 and the servicer is currently working toward appointing a receiver and continues to hold discussions regarding forbearance with the borrower. A new appraisal has not yet been ordered, but Morningstar DBRS expects that the property value has likely declined from the issuance appraised value of $51.6 million considering the loss of the flag and the change in use of the property. For this review, Morningstar DBRS liquidated this loan from the pool based on a stressed haircut to the issuance value, resulting in an implied loss of $3.6 million.

The pool's office exposure is concentrated in the top 10 loans, with the largest loan, 261 Fifth Avenue, secured by a Class B office building in Midtown Manhattan. The occupancy rate has declined to 86% as of March 2024 from 100% at issuance. As a result, cash flow and DSCR have also declined. The largest tenant is Town and Country Holdings Inc. representing 7.5% of the net rentable area (NRA) on a lease through September 2031. Despite some positive leasing traction in the last year, Morningstar DBRS expects cash flow will not stabilize to issuance levels. The decline in cash flow, the property's age and condition, and the upcoming loan maturity in September 2025 indicate refinance risk is elevated. To reflect this, Morningstar DBRS analyzed the loan with a stressed loan-to-value ratio (LTV) and increased POD, resulting in an expected loss that was more than double the deal average.

Another large office loan is 651 Brannan Street, which is secured by a Class B office building in San Francisco. Pinterest leases nearly 90% of the NRA through May 2029, but the tenant has been shedding its San Francisco footprint as the company implements its flexible hybrid/remote work model where employees have the choice to work in any of the 50 states within the U.S. or in a country of an international Pinterest office. Employees are only required to work from a Pinterest office once per year. According to media sources, Pinterest has subleased its space at the nearby 505 Brannan Street and halted its development plans at 88 Bluxome, a 500,000 square foot (sf) office property in the Bay Area. Reis reported the South of Market average office vacancy rate was 20.6% as of Q1 2024. It doesn't appear that the subject property is affected as it continues to serve as Pinterest's headquarters but, given the general shift in the tenant's demand for office space, high submarket vacancy rate, and scheduled loan maturity in September 2025, the refinance risk is elevated. As such, the loan was analyzed with a stressed LTV and POD, resulting in an expected loss that was nearly double the pool average.

The largest loan on the servicer's watchlist, Mall of New Hampshire, is the backed by a regional mall in Manchester, New Hampshire. A cash trap was implemented following the loan's return from special servicing in 2021, with $1.2 million of lockbox receipts collected, in addition to $0.5 million in an outstanding leasing reserve as of April 2024. A more updated figure was not provided. While the loan continues to perform, most recently reporting a healthy in-place DSCR of 1.74x as of YE2023, this is a significant decline from the Issuer's underwritten figure of 2.50x, representing about 30% in net cash flow since issuance. The loan benefits from institutional sponsorship in Simon Property Group and the Canadian Pension Plan Investment Board; however, given the sustained decline in performance, Morningstar DBRS believes the property's as-is value has declined significantly since issuance, with a stressed value scenario indicating an LTV in excess of 150.0%, significantly elevating the refinance risk at maturity in 2025.

The collateral is 405,723 sf of in-line space in an 811,573-sf Class B single-level enclosed regional mall, anchored by Macy's, JCPenney, and Dick's Sporting Goods¿none of which serve as collateral for the loan. As of March 2024, the collateral was 84.0% occupied, indicating moderate improvement from 82.0% at YE2022 following the departure of Olympia Sports (3.2% of NRA). The largest collateral tenants include Best Buy (10.4% of NRA, lease expires January 2024), Old Navy (4.6% of NRA, lease expires January 2027), and Ulta (2.9% of NRA, lease expires May 2025). Morningstar DBRS has inquired about the status of Best Buy's lease and is awaiting a response; however, according to the subject mall's website, the tenant is still in occupancy. According to the most recent tenant sales report provided for YE2022, the subject mall reported in-line sales (excluding Apple) of $437 per square foot (psf), an improvement from the in-line sales of $396 psf as of August 2021. In the analysis for this loan, Morningstar DBRS applied an elevated LTV and a stressed POD penalty, resulting in an expected loss that was more than double the pool average.

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

Classes X-A, X-B, X-D, and X-E 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. 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
DBRS Tower, 181 University Avenue, Suite 700
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

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 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].