DBRS Morningstar Confirms All Ratings on JPMBB Commercial Mortgage Securities Trust 2014-C26

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-C26 issued by JPMBB Commercial Mortgage Securities Trust 2014-C26 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class X-C at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class EC at A (high) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (low)
-- Class E at B (high) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)

Classes X-D, D, X-E, E, X-F, and F continue to carry Negative trends. All other trends remain Stable.

DBRS Morningstar’s loss expectations remain in line with the prior review. The Negative trends are driven by select loans that are showing increased risk from issuance, as further detailed below. In addition to factors at the loan level, these risks are mitigated by the increased credit support for the bonds, a result of paydowns since issuance. At issuance, the transaction consisted of 69 fixed-rate loans secured by 93 commercial and multifamily properties, with a trust balance of $1.45 billion. As of the February 2022 remittance, 56 loans remain within the transaction with a trust balance of $1.10 billion, reflecting collateral reduction of 23.9% since issuance. In addition, nine loans, representing 16.6% of the pool, have defeased. Four loans, representing 8.9% of the pool, are currently in special servicing and 16 loans, representing 29.6% of the pool, are on the servicer’s watchlist. Losses to date in the amount of $3.6 million have been contained to the non-rated Class NR certificate.

The largest specially serviced loan and largest contributor to DBRS Morningstar’s loss projections for the pool, Heron Lakes (Prospectus ID#4; 4.3% of the pool), is secured by seven Class A office buildings located in the West Belt submarket of Houston. The loan transferred to the special servicer in December 2018 after the borrower filed for bankruptcy. The asset has been real estate owned since February 2020, when the lender foreclosed on the property. Although the pandemic has been the most significant contributor to recent cash flow declines, it is noteworthy that the portfolio has underperformed since 2018, primarily as a result of tenant losses and increasing vacancy rates within the subject’s submarket. Performance has consistently lagged issuance expectations with the occupancy rate and debt service coverage ratio (DSCR) declining from 98.2% and 1.19 times (x) at issuance to 62.0% and 0.28x, respectively, as of October 2021.

The servicer marketed the properties for sale and reportedly received a purchase offer, which was subsequently terminated during the due diligence period. The servicer will focus on increasing occupancy and cashflow before a second attempt at a sale is pursued. The collateral was last appraised in 2019 with a value of $58.0 million, down from the issuance appraisal value of $71.0 million. However, the as-is market value has likely fallen since the last appraisal because of the prolonged periods of low occupancy, depressed cashflows, and elevated submarket vacancy rate, which stood at 26.8% as of YE2021. It is unclear why the special servicer has not obtained an updated appraisal since 2019 as annual updates are required by the transaction documents. Based on a haircut to the most recent valuation, DBRS Morningstar assumed a loss of approximately $37.0 million and a loss severity approaching 80% at disposition for this loan.

The largest loan on the servicer’s watchlist, Shaner Hotels Limited Service Portfolio (Prospectus ID#5; 4.1% of the pool), is secured by the borrower’s fee and leasehold interests in seven limited-service hotels, totalling 732 keys. Four of the hotels are in Florida with the remaining three assets located across West Virginia, Georgia, and Pennsylvania. Six hotels are flagged by Marriott and operate under the Courtyard and Fairfield brands, while the remaining hotel is flagged as a Holiday Inn Express by InterContinental Hotels Group. The loan was added to the servicer’s watchlist in April 2020 after the borrower requested financial relief. A loan modification was subsequently executed in June 2020, allowing the borrower to defer debt service payments for three months. The loan is currently in a cash trap because the DSCR has fallen below the required threshold of 1.2x.

Despite the portfolio facing an extended period of depressed occupancy and declining cashflow, the loan has remained current, with a cumulative reserve balance of $1.96 million as of the February 2022 remittance. Performance improved substantially between March and September 2021, driven by a 20% increase in occupancy. As a result, the DSCR increased from 0.3x to 1.1x over the same period, a factor that could incentivize the sponsor to keep the loan current. However, DBRS Morningstar remains concerned with the portfolio’s generally low occupancy, stressed cash flows, and uncertainty surrounding the sponsor’s plans for stabilization ahead of the scheduled 2024 loan maturity. For this review, DBRS Morningstar analyzed the loan with an elevated probability of default, to reflect the current risk profile of the underlying collateral.

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/373262.

Classes X-A, X-B, X-C, 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#4 – Heron Lakes (4.3% of the pool)
-- Prospectus ID#5 – Shaner Hotels Limited Service Portfolio (4.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 4, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

Generally, 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.

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

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