DBRS Morningstar Confirms All Ratings on COMM 2014-CCRE14 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-CCRE14 issued by COMM 2014-CCRE14 Mortgage Trust as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class D at BB (high) (sf)
-- Class E at CCC (sf)
-- Class F at C (sf)

All trends are Stable, with the exception of Classes E and F, which have ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings.

The rating confirmations and Stable trends reflect DBRS Morningstar’s current outlook and loss expectations for the transaction, which remains relatively unchanged from the prior rating action. Although pool performance is generally stable, it is noteworthy that there is a high concentration of loans collateralized by office properties, representing 54.7% of the current pool balance, including six top-10 loans. One of these, 175 West Jackson (Prospectus ID#8, 3.8% of the pool), is in special servicing and discussed in further detail below.

As of the June 2023 remittance, 41 of the original 59 loans remain in the trust, with an aggregate principal balance of $942.0 million, reflecting collateral reduction of 31.6% since issuance. To date, the trust has realized losses of approximately $37.9 million, with those losses contained to the unrated Class G and somewhat offset by continued amortization and increased defeasance. There are 17 loans, representing 25.3% of the pool, secured by collateral that has been fully defeased. In addition, 14 loans, representing 34.8% of the pool, are on the servicer’s watchlist, the majority of which are being monitored for upcoming loan maturities in October and November 2023. There is only one loan in special servicing.

The largest contributor to DBRS Morningstar’s projected loss amount is the 175 West Jackson loan, which is secured by a 22-story, 1.54 million-square-foot office tower in Chicago’s central business district. The loan has exhibited year-over-year performance declines since issuance and first transferred to the special servicer in 2018. It was returned to the master servicer in September 2018 following Brookfield Asset Management’s (Brookfield) acquisition of the property for $305 million ($218/square-foot), which represented a 26.0% discount to the issuance appraised value. Once known as the Insurance Exchange Building, the property was constructed in 1912 and is home to the regional headquarters of the Securities and Exchange Commission. However, Brookfield struggled to fill vacant space as tenant leases rolled and the loan subsequently transferred back to the special servicer for a second time in November 2021. As of the most recent reporting, the loan remains delinquent.

There has been limited leasing activity for office properties in the Central Loop submarket, which reported an average vacancy rate of 14.2% as of Q1 2023, according to Reis. As of March 2023, the property was 64.0% occupied, relatively unchanged from the YE2022 and YE2021 occupancy rates of 62.0% and 65.0%, respectively. Hybrid working arrangements, tenant downsizing, and continued uncertainty related to end-user demand have slowed leasing efforts at the property, which reported a YE2022 net cash flow of $9.1 million, a 65.4% decline when compared with the issuer’s underwritten levels. The servicer reported a YE2022 debt service coverage ratio (DSCR) of 0.50 times (x), compared with 0.34x at YE2021 and 1.44x at issuance. According to a Crain’s Chicago article, the largest tenant at the property, Enova International (Enova), which is headquartered at the subject, has executed an early lease renewal, pushing its maturity date from 2027 to 2035. However, Enova will be downsizing its footprint at the property by approximately 20.0%, from 168,141 square feet (sf) to 135,000 sf.

The most recent appraisal, dated December 2022, valued the property at $195.0 million, a 7.1% decline from the March 2022 appraised value of $210.0 million and a 31.6% decline from Brookfield’s purchase price of $305.0 million in 2018. The special servicer has confirmed that a receiver has been appointed and the lender is in discussions with the borrower about a potential cooperative sale process and/or deed in lieu. Based on the property’s declining performance, the most recent valuation, and soft submarket fundamentals, DBRS Morningstar liquidated the loan from its analysis, resulting in a loss severity approaching 50.0%.

625 Madison Avenue (Prospectus ID#3, 11.6% of the pool) is collateralized by the borrower’s leased fee interest in a 0.81-acre (35,146 square-foot) parcel of land at 625 Madison Avenue in Midtown Manhattan. The ground-lease tenant, SL Green (SLG), owns the improvements, a 17-story, Class A, mixed-use building with approximately 37,969 sf of ground- and second-floor retail space and 525,031 sf of office space that sits on top of the land. The ground-lease tenant’s interest in the improvements is not collateral for the 625 Madison Avenue loan. The loan was interest only (IO) through its anticipated repayment date (ARD) in December 2018, with principal paydown from excess cash post-ARD.

SLG and Ben Ashkenazy (the loan sponsor) have been involved in a protracted and ongoing dispute since Ashkenazy bought the land in 2014 for $400.0 million. At that time, SLG’s ground rent was $4.6 million per annum, a figure well below market, according to Ashkenazy. In April 2023, Ashkenazy was successful in raising the rent on the ground lease to $20.5 million after an arbitration ruling in his favor. However, SLG is now moving forward with foreclosing on Ashkenazy’s interest in the land after he defaulted on a $195.0 million mezzanine loan (which SLG owns a stake in) backing his position. At issuance, the unencumbered value of the land was appraised at $460 million, well above the current whole loan balance of $194.4 million. DBRS Morningstar expects that the land has largely retained its value given its prime location and development potential. The servicer noted that the borrower is continuing to make its debt service payments beyond its ARD of December 6, 2018. According to the YE2022 financials, the improvements were 100% occupied, with a DSCR of 1.03x, in line with historical metrics.

Most of the loans secured by office properties in this transaction continue to perform as expected, based on the most recent financials available. However, DBRS Morningstar 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. While the largest two loans secured by office properties, Google and Amazon Office Portfolio (Prospectus ID#1, 15.1% of the pool) and 60 Hudson Street (Prospectus ID#2, 16.5% of the pool), continue to perform in line with expectations, three loans secured by office properties, representing 7.9% of the current pool balance, were identified by DBRS Morningstar as having exhibited weakening performance and/or increased credit risk. To further test the durability of the ratings, DBRS Morningstar’s analysis includes increased probability of default penalties and, in certain cases, stressed loan-to-value adjustments for loans that are secured by office properties.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

DBRS Limited
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Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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