DBRS Morningstar Confirms All Ratings on COMM 2014-UBS4 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-UBS4 issued by COMM 2014-UBS4 Mortgage Trust as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 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 (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class PEZ at A (sf)
-- Class D at BBB (low) (sf)
-- Class X-C at B (high) (sf)
-- Class E at B (sf)
-- Class X-D at B (sf)
-- Class F at B (low) (sf)

Classes D, X-C, E, X-D, and F carry Negative trends. All other trends remain Stable.

DBRS Morningstar’s loss expectations remain in line with the prior review, driven primarily by two loans of concern that continue to show increased risk from issuance, as further detailed below. In addition to factors at the loan level, these risks are mitigated by increased credit support to the bonds as a result of scheduled amortization and loan repayments.

At issuance, the transaction consisted of 91 fixed-rate loans secured by 124 commercial and multifamily properties, with a trust balance of $1.29 billion. As of the February 2022 remittance, 80 loans remain within the transaction with a trust balance of $1.03 billion, reflecting 20.0% collateral reduction since issuance. There are currently 17 fully defeased loans, representing 9.7% of the pool, up from 7.2% of the pool at the last review. In addition, seven loans, representing 16.4% of the pool, are currently in special servicing and 21 loans, representing 48.7% of the pool, are on the servicer’s watchlist.

The largest loan on the servicer’s watchlist, State Farm Portfolio (Prospectus ID#1; 12.4% of the pool), is secured by 14 cross-collateralized and cross-defaulted properties spread across 11 states. The portfolio properties were 100% occupied by State Farm Mutual Automobile Insurance Company (State Farm) at issuance. The loan was added to the servicer’s watchlist in December 2021 for failure to provide updated financial reporting. State Farm offices in the United States have reportedly transitioned to a hybrid/flex model, whereby the majority of the organization’s workforce will be expected to rotate between on-site and remote work. State Farm had previously announced it would not be renewing leases for 12 operation facilities across various states, including but not limited to Tennessee, Virginia, Nebraska, New York, Florida, and Colorado.

Although State Farm has vacated the majority of properties serving as collateral, DBRS Morningstar expects State Farm to honour the terms of existing in-place leases, all but two of which extend to 2028. Given that the majority of lease expirations are four years past the loan’s scheduled 2024 maturity, refinance risk, rather than term risk, is the primary concern, as long-term prospects for the collateral properties remain precarious. State Farm has noted that it will continue to sublease vacant space for the duration of its lease agreements. State Farm’s in-place lease agreements do not provide for termination rights; however, property releases are permitted under the loan documents, to the extent of 25% of the original portfolio loan amount. As of the February 2022 remittance, the loan remains current. DBRS Morningstar will continue to monitor the loan for updates.

The largest specially serviced loan, 597 Fifth Avenue (Prospectus ID#2; 10.2% of the pool), is secured by two adjacent mixed-use properties in Manhattan’s Midtown neighbourhood. The property consists of 80,032 square feet of Class B office and ground-floor retail space. The loan transferred to special servicing in October 2020 because of imminent payment default. A new leasing and management firm has been appointed, and a consent agreement was approved allowing for the use of reserves to fund debt service payments. The loan has since been brought current and discussions regarding a proposed loan modification remain ongoing. A discounted-payoff proposal made by the borrower was rejected, and the special servicer is reportedly dual-tracking foreclosure.

Cash flows at the property have been in flux since Sephora vacated the ground-floor retail space in 2017. The space was later taken by Lululemon on a short-term basis; however, Lululemon’s departure in 2020 (formerly 10.0% of net rentable area) caused significant cash flow declines, given that 80% of the asset’s total base rent has historically been generated by the retail tenant. Club Monaco has since taken over the space on a lease expiring in 2023, roughly one year prior to loan maturity. As of September 2021, the property was reportedly 70% occupied with a debt service coverage ratio of 0.09 times. There is a general concern related to the performance of retail space along the Fifth Avenue corridor, which has been affected by increasing vacancy rates. Moreover, the loan sponsor, Joseph Sitt of Thor Equities, has a number of other properties in various states of delinquency and/or foreclosure. For these reasons, DBRS Morningstar’s risk profile for this loan has significantly increased from issuance.

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.

Classes X-A, X-B, X-C, and X-D 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – State Farm Portfolio (12.4% of the pool)

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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