DBRS Morningstar Downgrades Ratings on Four Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2015-C27

DBRS Limited (DBRS Morningstar) downgraded its ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2015-C27 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C27 as follows:

-- Class X-F to BB (low) (sf) from BB (high) (sf)
-- Class F to B (high) (sf) from BB (sf)
-- Class G to CCC (sf) from B (sf)
-- Class H to C (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed its rating on the following classes:

-- 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 (high) (sf)
-- Class D at BBB (sf)
-- Class X-E at BBB (sf)
-- Class E at BBB (low)

DBRS Morningstar discontinued and withdrew the rating on Class X-GH as the lowest referenced obligation was downgraded to CCC or lower. The trends on Classes D, E, F, X-D, X-E, and X-F were changed to Negative from Stable. All other classes have Stable trends, except for Classes G and H, which have ratings that generally do not carry trends in commercial mortgage-backed securities (CMBS) ratings.

The rating downgrades and Negative trends primarily reflect ongoing concerns with the largest loan in special servicing, Granite 190 (Prospectus ID#5, 5.6 % of the pool balance). The deterioration in the risk profile for that loan has also supported previous rating actions, including the placement of Negative trends on Classes G, H, and X-GH in August and November 2022. The loan is secured an office property in the Dallas suburb of Richardson, Texas. DBRS Morningstar has been monitoring the loan closely because of significant rollover risks related to the two largest tenants, United Healthcare (UHC) and Parsons Services Company (Parsons). Related to events with these two tenants, the loan recently transferred to the special servicer for imminent default.

The largest tenant, UHC, initially occupied about 65.0% of the net rentable area (NRA) but downsized to 56.1% of the NRA in 2021. According to the servicer, the tenant is expected to downsize further to about 43,000 square feet (sf) of space (occupying approximately 14.0% of the NRA) at the June 2023 lease expiry, signing for a three-year term through June 2026. During the renewal period, UHC will pay a rental rate of $26.50 per square foot (psf) and will receive three months of free rent. In addition, Parsons exercised its early termination option to vacate the subject in March 2023, paying a termination fee of about $928,000 that is currently held in reserve with the servicer. A cash trap was triggered with the departure of the two largest tenants and according to the servicer, approximately $222,000 was held in the cash management account as of June 2023.

The property is generally well located within the Dallas area, in the northeast portion of the larger metropolitan area, where significant commercial development has been concentrated over the last decade or so around the President George Bush Turnpike, a major regional transportation artery. The building is attractive and proximate to similar development and other commercial draws in the area. Relatively moderate leasing activity has been recorded with two tenants totaling approximately 47,000 sf of space signed, with rental rates ranging from $18.50 psf to $26.50 psf. The new tenants have lease terms of approximately seven years, with end dates that extend beyond the loan maturity. However, even with these signings, the property’s leased rate remains significantly depressed, at approximately 32.0% according to the servicer’s update. According to Reis, office properties located in the Plano/Allen submarket reported a Q1 2023 vacancy rate of 26.0% and effective rental rate of $22.52 psf, compared with the Q1 2022 vacancy rate of 25.4% and effective rental rate of $21.22 psf.

Based on the most recent financials, the loan reported a YE2022 debt service coverage ratio (DSCR) of 1.26 times (x) but coverage is expected to fall well below break-even at the leased rate of 32.0%. A resolution strategy has yet to be determined, but a receiver was appointed in May 2023. Given the decline in performance and the overall soft office submarket, the as-is property value is likely well below the issuance value of $55.0 million. With this review, DBRS Morningstar analyzed the subject loan with a liquidation scenario based on a significant haircut to the issuance value, resulting in a loss severity in excess of 40.0%. The projected loss would erode the credit enhancement of the lower-rated tranches, supporting the rating downgrades and Negative trends with this review.

According to the June 2023 remittance report, 50 of the original 55 loans remain in the pool with an aggregate trust balance of $684.1 million, representing a collateral reduction of 16.8% since issuance. Since the November 2022 review, the La Quinta Russellville loan (Prospectus ID#35) was liquidated from the trust with a realized loss of $2.1 million, which was contained to the nonrated Class G. The pool is concentrated by property type with retail, mixed-use, and multifamily properties representing 22.6%, 19.6%, and 18.4%, respectively. Defeasance collateral in the trust represents 6.4% of the pool balance. There are two loans in special servicing and six loans on the servicer’s watchlist, representing 6.7% and 15.6% of the pool balance, respectively. The watchlisted loans are primarily being monitored for a decline in DSCR and/or occupancy, delinquent taxes, or deferred maintenance items.

The largest watchlisted loan, Crowne Plaza – Hollywood, FL (Prospectus ID#2, 7.6% of the pool balance), is secured by a 311-key full-service hotel, located along Ocean Drive in Hallandale Beach, Florida, and currently operates under the Hilton flag as a DoubleTree hotel. The loan was previously in special servicing in 2020 because of challenges arising from the Coronavirus Disease (COVID-19) pandemic but a forbearance agreement was ultimately approved, and the loan returned to the master servicer. To date, all forborne payments have been repaid. The loan is on the servicer’s watchlist because of a low DSCR, with the trailing 12-month (T-12) period ended March 31, 2023, figure at 1.19x, compared with the YE2022 DSCR of 1.18x, YE2020 DSCR of 0.78x, and Issuer’s DSCR of 1.56x. Overall, departmental revenue is generally in line with issuance expectations, but expenses have increased, specifically real estate taxes and general and administrative expenses. Based on the T-12 March 31, 2023, STR, Inc. report, the subject reported an occupancy rate, average daily rate, and revenue per available room (RevPAR) of 61.0%, $213.18, and $129.97, respectively, which represents a RevPAR penetration of 58.7%. Despite improvements from the lows of 2020, NCF is still below issuance expectations and the subject continues to underperform when compared with the competitive set. As such, DBRS Morningstar analyzed this loan with an elevated probability of default, resulting in an expected loss that is more than double the weighted-average pool expected loss.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Classes X-A, X-B, X-D, X-E, and X-F 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.

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.

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.

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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 v 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.