DBRS Morningstar Downgrades Ratings on Two Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C17, Confirms Remaining Classes

DBRS Limited (DBRS Morningstar) downgraded its rating on two classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-C17 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2014-C17 as follows:

-- Class E to CCC from B (low) (sf)
-- Class F to C (sf) from CCC (sf)

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

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class PST at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable, with the exception of Classes E and F as those classes are assigned ratings that generally do not carry trends in commercial mortgage-backed securities (CMBS) ratings.

The downgrades are reflective of monthly, reoccurring losses that have affected the trust related to the largest specially serviced loan, Holiday Inn Houston Intercontinental (Prospectus ID#17; 2.9% of the pool balance). Since the October 2022 remittance, monthly losses averaging $1.0 million have been passed through to the trust as a result of the servicer clawing back reimbursable advances that have now been deemed nonrecoverable. Since the time of the last rating action in November 2022, the outstanding balance of Class G has been reduced by $7.5 million to $25.2 million, eroding the overall credit support to the trust. It is uncertain how long these clawbacks will persist. As of the May 2023 remittance, the loan had $24.1 million of outstanding advances, with the total loan exposure at $46.4 million.

Holiday Inn Houston Intercontinental is secured by a full-service hotel in Houston, one mile south of the George Bush Intercontinental Airport and 12 miles north of the Houston central business district (CBD). The loan was transferred to the special servicer in March 2017 due to imminent default, with a receiver appointed in August 2017. The property has been real estate owned since July 2018 and was most recently reappraised at $22.5 million as of November 2022, slightly lower than the February 2022 valuation of $22.7 million but higher than the January 2021 valuation of $20.9 million. It is worthy to note that a $15.0 million renovation ($36,000 per key) was completed in February 2020. As mentioned above, servicing advances have accrued significantly and are currently in excess of the collateral value. DBRS Morningstar located a LoopNet posting advertising an auction that will take place between June 26 and June 28, 2023. With this review, DBRS Morningstar analyzed the loan with a liquidation scenario. Given the most recent appraised value and high exposure, DBRS Morningstar expects the resulting loss severity to exceed 100%.

The second-largest loan in special servicing is Arrowhead Professional Park (Pros ID#33; 1.3% of the pool balance), secured by a 40,000-square-foot (sf) medical office property, consisting of four buildings and located in Glendale, Arizona. The loan transferred to special servicing in November 2020 due to monetary default and foreclosed in April 2022. Occupancy at the subject has been depressed since the departure of the former largest tenant, Arrowhead Health Center (54% of the net rentable area (NRA)) and several other tenants that vacated thereafter with the YE2022 occupancy rate at 20.0%. According to the servicer, the subject is expected to be sold by Q3 2023. As of the January 2023 appraisal, the property was valued at $7.9 million, down from the May 2022 value of $8.4 million and issuance value of $13.1 million. With this review, DBRS Morningstar analyzed the loan with a liquidation scenario, resulting in a loss severity in excess of 30.0%.

The largest loan in the pool is Marriott Philadelphia Downtown (Pros ID#1; 13.3% of the pool balance), which is secured by a 1,408-key, full-service hotel in Philadelphia. The loan is on the servicer’s watchlist for a low debt service coverage ratio (DSCR), following performance challenges during the Coronavirus Disease (COVID-19) pandemic. The loan reported negative cash flows at YE2020 and YE2021. Performance has shown evidence of stabilization, with the YE2022 DSCR reported at 1.13 times (x), although this remains well below the pre-pandemic DSCR of 2.37x as of YE2019. According to the most recent STR report, the property reported an occupancy rate, average daily rate (ADR) and revenue per available room (RevPAR) of 46.4%, $221.64, and $102.75, respectively, for the trailing 12-month (T-12) period ended December 31, 2022. The RevPAR market penetration for this period was 101.0%. This is an improvement over the T-12 September 30, 2021, RevPar figure of $32.80 but still below pre-pandemic levels with the T-12 March 31, 2019, RevPAR at $152.39. Despite the improved RevPAR, performance still lags behind pre-pandemic levels, and with an upcoming maturity in February 2024, the refinance risk is considered to be elevated. As such, DBRS Morningstar maintained its stressed probability of default in its analysis for this loan, resulting in an elevated expected loss that is more than double than the weighted-average expected loss for the pool.

At issuance, the trust consisted of 67 fixed-rate loans secured by 72 commercial properties with a trust balance of $1.04 billion. Per the May 2023 remittance, 52 of the original 67 loans remain in the trust with a trust balance of $636.0 million, representing a 38.7% collateral reduction since issuance. Defeasance collateral represents 12.1% of the pool balance. In terms of the pool composition, loans secured by retail and hotel properties represent 30.1% and 29.3% of the pool balance, respectively, while the singular office loan represents 1.4% of the pool balance and is currently in special servicing. All loans in the pool are scheduled to mature in 2024. There are a total of four loans in special servicing and six loans on the servicer’s watchlist, representing 5.6% and 21.4% of the pool balance, respectively.

At issuance, DBRS Morningstar shadow rated the Courtyard King Kamehameha’s Kona Beach Hotel Leased Fee loan (Prospectus ID#6; 5.8% of the pool) as investment grade. With this review, DBRS Morningstar confirms that the performance of the loan remains consistent with investment-grade loan characteristics.

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 and X-B 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.

DBRS Limited
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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.