Morningstar DBRS Downgrades Credit Ratings on Two Classes of A10 Permanent Asset Financing 2015-I, LLC

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on the following classes of notes issued by A10 Permanent Asset Financing 2015-I, LLC:

-- Class B Notes to BBB (high) (sf) from A (low) (sf)
-- Class C Notes to B (sf) from B (high) (sf)

Morningstar DBRS also confirmed its AAA (sf) credit rating on the Class A Notes.

In conjunction with the downgrades, Morningstar DBRS changed the trends on both the Class B and Class C Notes to Stable from Negative. The trend on the Class A Notes remains Stable.

The credit rating downgrades reflect the increased credit risk to the transaction given the prolonged negative outlook surrounding the majority of the office collateral in the transaction, which, as of the December 2024 reporting, included nine loans representing 47.3% of the current pool balance. The office concentration includes four of the largest five loans in the transaction (36.6% of the pool balance), three of which (30.9% of the pool) are on the servicer's watchlist for low occupancy rates and low cash flow. The fourth loan has been in special servicing since May 2022 and became Real Estate Owned in December 2023. In its previous credit rating action in February 2024, Morningstar DBRS assigned Negative trends to the Class B and Class C Notes on concerns surrounding the transaction's office concentration. Morningstar DBRS downgraded the Class B and Class C Notes because of the lack of stabilization over the past year for the majority of these loans and continued underperformance. In Morningstar DBRS' view, the updated credit ratings reflect the current credit risk, justifying the revision of the trends on both the classes to Stable from Negative.

Since the February 2024 credit rating action, three loans have been repaid from the trust. As of the December 2024 remittance, the pool consists of 34 loans with a cumulative trust balance of $209.0 million, representing a collateral reduction of 30.2% since issuance and an increase of 8.0% from the previous credit rating action. As noted above, office properties represent the largest concentration by property type in the transaction. For loans exhibiting increased credit risks, Morningstar DBRS applied loan-to-value (LTV) and/or probability of default (PoD) adjustments, resulting in increased loan expected loss levels, where appropriate. The second-largest property type concentration in the transaction is retail, with 17 loans representing 40.8% of the current pool balance. This concentration remains consistent from the prior year.

The specially serviced asset, Northwoods Crossing (Prospectus ID#24, 5.7% of the pool), comprises a two-building office property in Allentown, Pennsylvania. The property is nearly completely vacant, with occupancy most recently reported at 3.7% as of June 2024. Property valuations have fluctuated in recent years. The most recent appraisal, dated May 2024, valued the property at $6.7 million, up from $5.1 million in July 2023, but below the June 2022 value of $7.4 million. According to the servicer commentary, one of the two collateral buildings is under contract to be sold. As of December 2024 reporting, the servicer reported $1.5 million in protective and legal servicer advances due on the loan; however, the servicer also noted the advances are being reimbursed by the trust from excess spread on the unrated first loss piece and the outstanding advances are nominal. There is also $1.8 million in accrued interest, which will likely not be recouped as projected proceeds from collateral sales are expected to be below the outstanding loan balance of $11.8 million. The servicer continues to hold $3.4 million in cash reserves, reducing the outstanding loan exposure. In its analysis, Morningstar DBRS assumed a stressed property value and liquidated the asset from the pool, resulting in a loan loss severity of approximately 35.0%. The projected loss is contained to the unrated equity bond.

As of the December 2024 reporting, seven loans are on the servicer's watchlist, representing 40.0% of the current pool balance. The largest loan on the servicer's watchlist and in the transaction, 610 West Ash (Prospectus ID#35, 14.8% of the pool), is secured by an office property in downtown San Diego. The loan is being monitored for occupancy concerns. Occupancy has fallen to 51.1% following the expected departure of ESET in August 2024. The property's current largest tenant, Homeland Security, recently executed a three-year lease renewal through May 2028, at a gross rental rate of $45.69 psf. Despite the lease renewal, the loan will continue to operate under a cash flow sweep until the former ESET space is backfilled. The downtown San Diego office submarket continues to experience high vacancy, with a Q3 2024 vacancy rate of 24.1%, according to Reis. As of December 2024, there is $0.9 million in the excess cash reserve, $2.0 million in the rollover reserve, and $0.7 million in the capital expenditure (capex) reserve. According to the servicer-provided financials, the property generated $2.7 million in net cash flow (NCF), with a debt service coverage ratio (DSCR) of 1.18 times (x), for the trailing 12-month period (T12) ended June 30, 2024. Both metrics are below the YE2023 figures of $3.1 million and 1.35x, respectively, and Morningstar DBRS expects performance to worsen as the full impact of the lost revenue from ESET is realized. The loan remains current and there is approximately $30.00 psf of available leasing dollars to backfill the former ESET space. Depending on the current condition of the space and a potential new tenant's demands, this may be enough capital to execute a lease. Given the occupancy decline combined with soft market fundamentals, Morningstar DBRS applied a market cap rate to the T12 NCF, which resulted in an LTV near 100%. The resulting loan expected loss is above the expected loss for the pool.

The second-largest loan on the servicer's watchlist and in the transaction, View 8 (Prospectus ID#21, 9.6% of the pool), is secured by a Class A office property in Midvale, Utah. The loan was added to servicer's watchlist after existing tenant, ZAGG, vacated its space on the fourth floor (20.7% of the NRA) in conjunction with its August 2022 lease renewal, which reduced the occupancy rate to 77.4%. According to the servicer, the borrower has executed a lease with a new tenant for a portion of the former ZAGG space (14.1% of the NRA), which will increase the occupancy rate to 89.5%. The tenant received seven months of free rent and a tenant allowance of $50.00 psf, which is funded from existing reserves. As of December 2024, the rollover reserve had a balance of $1.7 million. The tenant's seven-year lease will commence in May 2025 at a starting rental rate of $27.75 psf with annual rent escalations of 3.0%. The property generated annualized NCF of $2.0 million for the trailing six months ended June 30, 2024, with a reported DSCR of 1.41x; however, performance should improve in the second half of 2025 as rental revenue from the new tenant is realized. In its analysis for this credit rating action, Morningstar DBRS applied a market cap rate to the in-place NCF, which resulted in an elevated LTV ratio. While cash flow is expected to improve, there is significant tenant rollover risk through loan maturity, including the largest tenant, Marriott International (49.6%), which has a lease expiration in December 2026. Morningstar DBRS removed the previous additional PoD adjustment to recognize the positive leasing momentum. The loan expected loss is similar to the expected loss for the pool.

The third-largest loan on the servicer's watchlist, 205 W Wacker (Prospectus ID#5, 6.6% of the pool), is secured by a 23-story, Class B office building within the Loop submarket of downtown Chicago. The trust loan has a current balance of $13.8 million and represents a 50.0% pari passu portion of the total $27.4 million loan. Performance of the asset has continued to decline year-over-year as vacancy within the Chicago office market has remained high. According to an update from the servicer, the property is 63.0% occupied; however, the occupancy rate is expected to decline to 53.0% following the known departures of several tenants. As a result, cash flow no longer supports debt service, with an annualized trailing six months' ended June 30, 2024, figure of $1.7 million, down from the YE2023 figure of $2.4 million. As the loan was in a forbearance agreement period through December 2024; however, the loan was reported as current as of December 2024 reporting. The borrower was provided a six-month forbearance in June 2024 under a potential two-phase agreement. Phase I included the conversion of debt service payments to interest-only and ceased required monthly capex and rollover reserve collections. In return, the borrower would be required to execute a deed-in-lieu of foreclosure and agree to cash management. Phase II would allow a loan modification and extension with potential use of $3.4 million held across various reserves to fund the creation of speculative suites at the property. According to the servicer, the deed-in-lieu action is currently in progress, though a potential closing date is currently unknown. In its current analysis, Morningstar DBRS applied a stressed market cap rate to the in-place NCF, which resulted in an elevated LTV in excess of 100.0%. In addition, Morningstar DBRS increased the PoD, resulting in a loan expected loss that is approximately two times greater than the expected loss for the pool.

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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024); https://dbrs.morningstar.com/research/437781

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.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective private rating letters at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (December 13, 2024; https://dbrs.morningstar.com/research/444617/north-american-cmbs-surveillance-methodology).

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

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.

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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 (December 13, 2024; https://dbrs.morningstar.com/research/444616/north-american-cmbs-multi-borrower-rating-methodology) /North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/428797

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024),
https://dbrs.morningstar.com/research/439702/morningstar-dbrs-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064/legal-criteria-for-us-structured-finance

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/410863.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.