Morningstar DBRS Downgrades Credit Ratings on Six Classes of COMM 2014-UBS3 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS3 issued by COMM 2014-UBS3 Mortgage Trust as follows:

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

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

-- Class A-4 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class F at C (sf)
-- Class G at C (sf)

The Negative trends on Classes B, X-B, PEZ and C were maintained with this review. Classes D, E, F, and G now have credit ratings that generally do not carry a trend in commercial mortgage backed securities (CMBS) credit ratings. All other classes have a Stable trend.

The credit rating downgrades reflect Morningstar DBRS' increased loss projections as the pool enters wind-down following the repayment of the bulk of the original pool. Since the last credit rating action, 31 loans have left the trust, contributing to significant deleveraging and concentration of largely higher credit risk collateral as performing loans reached maturity and ultimately repaid from the pool. There are five loans remaining in the pool as of the October 2024 remittance, all of which are secured by office properties and are in special servicing. Given the adverse selection and high concentration of defaulted assets, Morningstar DBRS considered liquidation scenarios for all remaining loans to determine recoverability for the remaining classes.

In addition to concerns with increased projected losses, there is also ongoing shorted interest to credit rated bonds, which is expected to continue building until the loans are disposed or resolved. As of the October 2024 remittance, cumulative unpaid interest totalled $5.7 million, up from $2.8 million at the last the credit rating action in December 2023. Class C has not received full interest since September 2024 and Class D has not received full interest since April 2024. Morningstar DBRS' tolerance for unpaid interest is limited to three to four remittance periods at the BBB (sf) credit rating category and six remittance periods at the BB (sf) and B (sf) credit rating categories. The Negative trends are reflective of increased propensity for interest shortfalls, as well as the potential for Morningstar DBRS' loss expectations to further increase should the underlying collateral values further deteriorate or the workout periods extend beyond the near to moderate term, exposing the trust to increased property protection and other expenses accruing over the workout periods.

The largest loan, State Farm Portfolio (Prospectus ID#2, 32.4% of the pool), is pari passu with notes held in the COMM 2014-UBS4 and COMM 2014-UBS5 transactions, both of which are rated by Morningstar DBRS, and the non-Morningstar DBRS rated MSBAM 2014-C16 transaction and is secured by a portfolio of 14 cross-collateralized, cross-defaulted office properties in 11 different states. The loan transferred to the special servicer in September 2023 and remains delinquent. Although the workout strategy has been noted as full payoff for the past year, there has been limited progress in the loan's resolution since the last credit rating action, which is now noted to be determined. Morningstar DBRS remains cautious about the refinance prospects given the underlying assets are leased but not occupied by State Farm Mutual Automobile Insurance Company (State Farm), with all but two of the leases running through 2028. While State Farm continues to make rent payments, it has physically vacated every property. The loan had an anticipated repayment date in April 2024, and is now hyperamortizing until April 2029 with annual resets of the interest rate. Recent servicer commentary indicates that one property is expected to be released in the near term. Although the continued rent payments are expected to continue to amortize the outstanding debt, Morningstar DBRS believes the current value deficiency to be significant given the dark status of the properties and the tertiary locations that will likely mean low investor demand. As such, a liquidation scenario was considered based on a stressed value analysis, which resulted in a loss severity approaching 35%.

The second largest loan is Equitable Plaza (Prospectus ID#3, 28.6% of the pool), which is secured by a 688,292-square-foot (sf) office property in Los Angeles. The loan transferred to the special servicer in April 2024 after the borrower indicated the loan would not be repaid by maturity in June 2024. The special servicer is dual-tracking the loan for maturity extension and foreclosure. Occupancy has been in decline over the last several years, dropping to 56% as of September 2023 from 67% at YE2021 and 82% at YE2020. According to the September 2023 rent roll, leases representing 29.0% of the net rentable area (NRA) were scheduled to expire through the next 12 months, posing risk for significant additional vacancy. The most recent financials available are for the trailing nine month period ended September 30, 2023, and indicate that cash flow has also been in year-over-year decline. At issuance, the subject was valued at $150.5 million and, although a new valuation has yet to be completed, Morningstar DBRS expects that the property's value has declined considerably given the drop in performance. In its analysis, Morningstar DBRS liquidated this loan from the pool based on a stress to the issuance appraisal for an implied loss severity in excess of 40%.

Morningstar DBRS considered a conservative recoverability approach for these and the other loans remaining and concluded that that senior most bonds are sufficiently insulated from loss and likely to be repaid. Morningstar DBRS remains concerned, however, with the timing of disposition of the remaining assets, and the likelihood that unpaid interest continues to accrue and the potential for further value decline.

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 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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Classes X-A and X-B 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 info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with only five loans remaining. In such cases, Morningstar DBRS credit ratings are typically based on a recoverability 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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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), https://dbrs.morningstar.com/research/428797
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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.