DBRS Morningstar Confirms Ratings on Citigroup Commercial Mortgage Trust 2015-GC31, Changes Trends on Two Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-GC31 issued by Citigroup Commercial Mortgage Trust 2015-GC31 as follows:

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

DBRS Morningstar also changed the trends on Classes F and G to Negative from Stable. All other trends remain Stable.

According to the September 2021 remittance, 48 of the original 50 loans remain in the trust, with loan repayments and scheduled amortization resulting in a collateral reduction of 6.6% since issuance. There are 10 defeased loans, representing 12.1% of the current pool balance. Loans secured by office and mixed-use property types represent the largest concentrations in the pool at 38.0% and 19.9% of the pool balance, respectively. As of the September 2021 remittance, two loans, representing 2.4% of the current pool balance, were in special servicing, and nine loans, representing 33.4% of the current pool balance, were on the servicer’s watchlist. The watchlisted loans are being monitored for low debt service coverage ratios (DSCRs) and/or occupancy issues, some of which are related to disruptions caused by the Coronavirus Disease (COVID-19) pandemic.

The rating confirmations reflect DBRS Morningstar’s generally stable view of the credit risk for the larger pool, which benefits from a relatively low percentage of loans secured by retail properties (19.9% of the pool balance), and the overall stable performance for the largest 15 loans in the pool, which collectively represent 73.1% of the pool balance.

DBRS Morningstar changed the trends on Classes F and G to Negative from Stable largely as a reflection of the increased risk of loss to the trust with the largest loan in special servicing, Crowne Plaza Bloomington (Prospectus ID#16, 1.6% of the pool balance), and the increased risks associated with the largest loan in the pool, which is backed by an office tower in Chicago, as further discussed below. The Crowne Plaza Bloomington loan is a pari passu loan that is secured by a 430-key full-service hotel in the Minneapolis suburb of Bloomington, Minnesota. The loan went 60 days delinquent in October 2020 and was transferred to special servicing in November 2020. A modification was approved that allowed for a forbearance of payments due between August 2020 and August 2021, but more recently, the special servicer’s commentary states that a discounted payoff (DPO) has been approved and is expected to close in the near term. The terms of the DPO have not been provided to DBRS Morningstar, but the low in-place cash flow that resulted in a DSCR of -2.05 times (x) as of the trailing six months (T-6) ended June 30, 2021, suggests the as-is value has fallen significantly from issuance. In addition, hotel revenues were consistently slightly below issuance expectations, with the YE2019 figure approximately 3.4% below the issuer’s estimate. Given the lack of an updated appraisal and any concrete details surrounding the DPO, DBRS Morningstar assumed a conservative liquidation scenario for this loan as part of this review that suggested a loss severity of approximately 40.0%.

The largest loan in the pool, 135 South LaSalle (Prospectus ID#1, 14.8% of the pool), was placed on the servicer’s watchlist because of the July 2021 lease expiration of the largest tenant, Bank of America (BofA; 62.3% of the net rentable area (NRA)). The servicer has confirmed that the tenant will vacate at lease expiration. The loan is full term interest only (IO) through the 2025 anticipated repayment date, with a final maturity date in 2030. The loan is secured by a 1.3 million-square-foot Class A office property in Chicago’s Central Loop submarket. The loan was structured with a cash flow sweep that was to begin 12 months prior to the BofA lease expiration date; however, the loan documents also allowed for the cash flow sweep requirement to be waived if the debt yield exceeded 10.0%, suggesting that a sweep will not be initiated until a debt yield calculation is made based on the property cash flows without the BofA rent. The servicer reports approximately $1.0 million in tenant reserves on the loan. The loan is conservatively structured, with the issuer’s DSCR at 5.42x, and the most recent figures reported by the servicer show an in-place DSCR of 4.94x for the T-6 period ended June 30, 2021. Based on the reported figures for 2021, DBRS Morningstar expects the in-place coverage to fall well below breakeven with the loss of BofA’s rent.

Outside of BofA, the remaining tenancy is quite granular, with the second-largest tenant representing just 1.4% of the NRA on a lease through August 2024. DBRS Morningstar expects that the sponsor will encounter significant difficulty securing a single tenant or a few larger tenants to backfill the space to be vacated by BofA given the soft submarket conditions and the general drop in demand that has been seen amid the coronavirus pandemic. According to Reis, the subject’s Central Loop submarket reported a vacancy rate of 15.9% as of Q2 2021, up from the Q4 2019 figure of 15.5%. Although the vacancy increase amid the pandemic has been relatively muted, it is noteworthy that vacancy had been on the rise in the few years prior to 2020, with the vacancy rate increasing significantly in the two years after it was reported at 13.4% for Q4 2017 as several larger tenants vacated buildings in the Central Loop and moved to newer projects in the West Loop. Reis forecasts that vacancy will increase to 17.4% by 2023 before notching down over 2024 and 2025, when the vacancy rate is forecast at 15.4%. Given these factors and the significant cash flow drop that will be realized with the loss of BofA, DBRS Morningstar applied a probability of default penalty for this loan to increase the expected loss in the analysis for this review.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class F, as the quantitative results suggested a higher rating. The material deviation is warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist.

Class X-A is an 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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