DBRS Morningstar Confirms All Ratings on LCCM 2014-909 Mortgage Trust, Removes Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by LCCM 2014-909 Mortgage Trust (the Issuer):

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)

All trends are Stable. DBRS Morningstar removed the ratings from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The loan is secured by 909 Third Avenue, a 32-storey, 1.3 million square foot (sf) Class A LEED Gold-certified office building in Manhattan’s prestigious Plaza District submarket. The loan is sponsored by Vornado Realty Trust, which has an ownership or management interest in over 20 million sf of office space in Manhattan. The property benefits from a concentration of investment-grade tenants, including the largest three tenants, which collectively occupy 66.5% of the net rentable area (NRA).

As at the January 2020 rent roll, the collateral was 98.9% leased with an average base rental rate of $38.77 per sf (psf), which represents a slight decline from the October 2018 occupancy rate of 99.1% and a slight increase in the average base rental rate from $36.82 psf. The subject’s largest tenant, the United States Postal Service (USPS), occupies 36.7% of the NRA through October 2023 and is currently paying a significantly below-market rental rate of $2.23 psf. At issuance, DBRS Morningstar conservatively estimated a market rental rate of $30.00 psf gross for the entire space, which would result in approximately $9.9 million in additional rental revenue if the space rolled to market rates. Other large tenants include CMGRP, Inc. (17.2% of the NRA), whose lease expires in February 2028, and Forest Laboratories Inc. (12.6% of NRA), whose lease expires in January 2027. Near-term rollover risk is moderate with only 5.0% of the NRA potentially expiring by January 2021.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $31.5 million derived at the 2019 surveillance review was accepted and a cap rate of 7.0% was applied, resulting in a DBRS Morningstar Value of $450.7 million, a -36% variance from the appraised value of $700.0 million. The DBRS Morningstar Value implies an LTV of 77.7% compared with the LTV of 50.0% on the appraised value at issuance.

The NCF figure applied as part of the analysis represents a 6.3% variance from the Issuer’s NCF, primarily driven by gross potential rents and expense reimbursements (primarily the higher assumed market rent for the USPS space). As of YE2019, the servicer reported a NCF figure of $26,493,378, a 16.0% variance from the 2019 DBRS Morningstar NCF figure, primarily a factor of gross potential rents and operating expenses.

DBRS Morningstar applied a cap rate at the middle of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property vintage, USPS warehouse facility, and relatively inferior location to other Class A properties in the submarket. In addition, the 7.0% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.22% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 3.0% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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. 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.

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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