Morningstar DBRS Downgrades Credit Ratings on Five Classes of CGCMT 2015-GC33, Changes Trends on Four Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of commercial mortgage-backed notes issued by CGCMT 2015-GC33 as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes 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)

Morningstar DBRS changed the trends on Classes C, D, X-D, and PEZ to Negative from Stable. Classes A-3, A-4, A-AB, A-S, X-A, and B continue to carry Stable trends. There are no trends for Classes E, F, and G, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS).

The credit rating downgrades reflect Morningstar DBRS' increased loss projections for the loans in special servicing, primarily driven by Illinois Center (Prospectus ID#1, 11.2% of the pool), a recent transfer that is no longer expected to be supported by the borrower. Morningstar DBRS considered liquidation scenarios for both specially serviced loans, representing 11.9% of the pool, resulting in total implied losses of approximately $54.2 million, an increase from Morningstar DBRS' projected losses of $0.7 million from the sole specially serviced loan at the time of the last credit rating action. Those losses would completely erode the nonrated Class H, as well as the balance of rated Classes F and G, and a partial write down of the balance of Class E, significantly reducing credit support for the transaction as a whole.

The Negative trends reflect Morningstar DBRS' concerns with several nonspecially serviced loans that have exhibited increased risk of default given performance challenges, property type, and/or general market concerns, as the majority of the remaining loans are scheduled to mature in Q2 and Q3 2025. With this review, Morningstar DBRS identified 13 loans, representing 19.6% of the pool, facing elevated refinance risk. For these loans, Morningstar DBRS applied stressed loan-to-value ratios (LTVs) and/or elevated probability of defaults (PODs) to increase the expected loss at the loan level as applicable. These adjusted loans had a weighted average (WA) expected loss (EL) that was over one and a half times the pool's WA figure.

The credit rating confirmations and Stable trends reflect the otherwise overall stable performance of the nonspecially serviced loans in the pool, which Morningstar DBRS generally expects to repay at maturity based on the most recent year-end (YE) weighted-average debt service coverage ratio (DSCR) that is above 1.68x. As of the May 2024 reporting, 59 of the original 64 loans remain in the pool with an aggregate principal balance of $837.6 million, representing a collateral reduction of 12.6% since issuance, as a result of scheduled amortization, loan repayment, and the liquidation of one loan. There are 14 loans, representing approximately 17.0% of the pool, that are fully defeased, and 16 loans, representing 23.5% of the pool, that are on the servicers watchlist, predominantly being monitored for a low DSCR, occupancy, and/or deferred maintenance. By property type, the pool is most concentrated by loans secured by office properties (29.0% of the pool), followed by retail (21.9% of the pool) and lodging (20.6% of the pool) properties.

The largest loan in special servicing and in the pool, Illinois Center, is secured by two adjoining Class A office towers in downtown Chicago. The loan has been monitored on the servicer's watchlist for performance declines resulting from the COVID-19 pandemic, and was recently transferred to special servicing in April 2024 for payment default. Occupancy fell to 67.0% at YE2020 following the departure or downsizing of several tenants, a trend that has continued at the properties, as occupancy fell from 64.7% at YE2022, to 47.8% at YE2023. Notable departures include the Bankers Life and Casualty Company (formerly 6.4% of net rentable area (NRA) and the U.S. General Services Administration - Department of Health and Human Services (formerly 8.1% of NRA), which had lease expirations in August and November 2023, respectively. While financial performance slightly rebounded in 2023 yielding a debt service coverage ratio of 1.27 times (x), the increased vacancy indicates a coverage that is well below breakeven, with 15 tenants, representing 14.2% of NRA, that have leases scheduled to expire prior to loan maturity in August 2025.

At last review, the borrower was planning to renovate and/or improve the interior amenities and exterior of the conference center in an effort to stabilize operations; however, there has been no update on those plans and the loan is now delinquent, with individual occupancy rates of 62.1% for 111 East Wacker and 33.9% for 233 North Michigan Avenue. Per Reis, the East Loop submarket reported an average vacancy rate and rental rate of 11.7% and $26.43 per square foot (psf), compared with the subject's in-place rate of 52.2% and $23.2 psf. As the properties have yet to be reappraised, Morningstar DBRS liquidated these loans based on a stressed haircut to the issuance appraised value of $390.0 million, given the soft submarket performance, upcoming rollover risk, and general lack of liquidity for this property type. This resulted in a loss severity exceeding 50.0%, with the stressed value estimate on a per square foot basis relatively in line with several other Chicago office properties that are securitized in CMBS transactions that are in special servicing.

The Decoration and Design Building (Prospectus ID#3, 7.4% of the pool) is secured by the leasehold interest in an 18-story office building that is mainly used as a showroom in Midtown Manhattan, New York. The loan was placed on the watchlist in May 2023 for low occupancy after several tenants vacated the property and is past due for the April and May 2024 debt service payments. The property was 65.3% occupied as of October 2023, relatively stable with the YE2022 figure of 66.1%, but otherwise showing steady decline from 77.1% at YE2021 and 94.8% at issuance. The property's net cash flow (NCF) has also shown decline over time as a result of the increased vacancy, with an annualized Q3 2023 figure of $14.6 million (a DSCR of 1.53x), down from $15.7 as of YE2022, $17.3 million as of YE2021 and the Issuer's NCF of $22.1 million. There are also 14 tenants, representing 13.3% of NRA, that have leases scheduled to expire during the next 12 months.

The property is also subject to a noncollateral ground lease that had an initial expiration in December 2023, with two renewal options that extend the maturity to December 2063. As noted at issuance, per the land's issuance appraisal, without accounting for inflation, ground rent was expected to reset to an estimated $13.8 million in January 2024, well above the initial fixed rate of $3.8 million. Morningstar DBRS has confirmed the ground lease has been extended for another 25 years; however, the increased ground rent is more gradual than anticipated, increasing to $5.75 million in 2024 and $6.0 million 2026, when the loan is scheduled to mature. Morningstar DBRS expects that performance is likely to further decline, given the concentrated rollover risk and increased ground rent. As such, Morningstar DBRS applied an elevated LTV and a stressed POD penalty, resulting in an expected loss nearly one and half times the pool's WA expected loss.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, Governance factors 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 Risk Factors in Credit Ratings at (January 23, 2024; https://dbrs.morningstar.com/research/427030)

Classes X-A 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 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 rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
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)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://dbrs.morningstar.com/research/420982)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.