Morningstar DBRS Downgrades Credit Ratings on Three Classes of Citigroup Commercial Mortgage Trust 2015-GC31
CMBSDBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2015-GC31 issued by Citigroup Commercial Mortgage Trust 2015-GC31 as follows:
-- Class A-S to A (high) (sf) from AA (sf)
-- Class B to B (sf) from BBB (sf)
-- Class X-A to AA (low) (sf) from AA (high) (sf)
In addition, Morningstar DBRS confirmed the following credit ratings:
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class C at CCC (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)
-- Class PEZ at CCC (sf)
Morningstar DBRS changed the trends on Classes A-S and X-A to Stable from Negative and maintained the Negative trend on Class B. Classes C, D, E, F, G, and PEZ have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. Classes A-3, A-4, and A-AB have Stable trends.
The credit rating downgrades on Classes A-S and B reflect the increased loss projections for loans in special servicing, primarily driven by the two largest loans in the pool, 135 South LaSalle (Prospectus ID#1, 16.0% of the pool) and Selig Office Portfolio (Prospectus ID#2, 11.5% of the pool). Since the last credit rating action in March 2024, the Selig Office Portfolio transferred to special servicing after the borrower indicated it would be unable to pay off the loan at the maturity in April 2025. Morningstar DBRS liquidated this loan with this review, suggesting trust losses through Class C and eroding credit enhancement on Classes A-S and B, supporting the credit rating downgrades. In addition, Morningstar DBRS changed the trends on Classes A-S and X-A to Stable from Negative given that the updated credit ratings appropriately reflect their credit risk.
While the loan remains current as of the January 2025 remittance, Morningstar DBRS notes that the risk of payment default remains high, an event that would extend the recoverability timeline for the outstanding bonds and increase the propensity for interest shortfalls. Interest shortfalls as of the January 2025 remittance already totaled $5.2 million, an increase from $2.0 million at the last credit rating action in March 2024. Unpaid interest continues to accrue month over month, driven primarily by interest shortfalls deemed nonrecoverable from the largest loan in special servicing, 135 South LaSalle. Morningstar DBRS' credit ratings are constrained by the expectation of accruing interest shortfalls prior to repayment, and Morningstar DBRS could take further credit rating actions if full interest to the Class B certificate goes unpaid for an extended period of time, which is the primary consideration for the Negative trend on this class.
The largest loan in the pool is secured by 135 South LaSalle, a Class A office property commonly known as the Field Building, in Chicago's central business district. The loan transferred to special servicing in November 2021 for payment default after the former largest tenant, Bank of America (previously 62.3% of the net rentable area), vacated the majority of its space at the July 2021 lease expiration, bringing the occupancy rate down to just under 20%. Since the last credit rating action, outstanding loan-level advances have increased by more than $9 million, and occupancy remained depressed at 14% as of September 2024. The subject property was selected as one of five finalists for the LaSalle Corridor Revitalization project, which is geared toward transforming dated office space into residential housing. While the potential for redevelopment remains promising, the timing and extent to which funding will be available remains unclear. An updated appraisal dated January 2024 valued the subject at $67.7 million, a continued decline from $90 million in January 2023 and well below the issuance value of $330 million. Morningstar DBRS' analysis for this loan included a liquidation scenario based on a 10% haircut to the January 2024 appraised value, in addition to outstanding advances and expected servicer expenses, which totaled more than $30 million. This analysis suggested a projected loss severity approaching 75%, or approximately $75 million.
The second-largest loan in special servicing is the Selig Office Portfolio, which is secured by a portfolio of nine office buildings totaling 1.6 million square feet throughout Seattle. The subject loan of $72.0 million represents a pari passu portion of a $379.1 million whole loan, with the additional senior notes secured in the Morningstar DBRS-rated BMARK 2021-B23 and GSMS 2015-GC30 transactions and the non-Morningstar DBRS-rated CGCMT 2015-GC29 and GSMS 2015-GC32 transactions. The loan transferred to the special servicer in December 2024 after the borrower indicated it would be unable to pay off the loan at its scheduled maturity in April 2025. Per the most recent servicer commentary, the borrower and special servicer are discussing a potential loan extension; however, nothing has been finalized. Occupancy has been declining in recent years and was most recently reported at 64.0% for the trailing six-month period ended June 30, 2024, compared with the issuance occupancy rate of 92.3%. For the same time periods, the loan reported a debt service coverage ratio of 1.87 times (x) and 2.22x, respectively. Office properties within the Central Seattle submarket reported an average vacancy rate of 20.0% in Q3 2024, according to a Reis report. While modification discussions are generally noted to be relatively positive developments, Morningstar DBRS remains concerned about the subject's declines in occupancy and cash flows, as well as the softening submarket fundamentals in recent years. Morningstar DBRS believes that the borrower's inability to refinance the loan by the scheduled maturity is a direct result of these factors, with no significant improvement expected in the near to moderate term. As such, the sponsor's willingness to commit additional capital and/or otherwise support the loan could be limited. Given these factors, the loan was analyzed with a liquidation scenario based on a stressed value analysis. As the servicer has not provided updated appraisals to date, Morningstar DBRS referenced updated appraisals for similar Seattle office properties (also owned by the sponsor) in other Morningstar DBRS-rated CMBS transactions. A haircut of 55% to the issuance appraised value for the subject portfolio was applied based on the values per square foot implied by a stress to the comparative appraised values. The analyzed liquidation scenario resulted in a loss severity of more than 40%, or approximately $31.0 million.
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 press releases 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.
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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.
Class X-A is an interest-only (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 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 (December 13, 2024) https://dbrs.morningstar.com/research/444617.
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.
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.
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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 and North American CMBS Insight Model version 1.2.0.0 (December 13, 2024)
https://dbrs.morningstar.com/research/444616
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024)
https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024)
https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024)
https://dbrs.morningstar.com/research/438283
-- Global Structured Finance Flow-Through Ratings (December 12, 2024)
https://dbrs.morningstar.com/research/444530
For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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