DBRS Morningstar Upgrades and Confirms Certain Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18, Removes Under Review with Developing Implications Status

DBRS, Inc. (DBRS Morningstar) upgraded the ratings on two classes and confirmed the ratings on the remaining classes of nonpooled rake bonds of the Commercial Mortgage Pass-Through Certificates, Series 2014-C18 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18 (the Issuer), which are backed by the $244.4 million subordinate B note of the Class 300 Certificates, as follows:

-- Class 300A confirmed at AA (high) (sf)
-- Class 300B confirmed at A (sf)
-- Class 300C confirmed at BBB (sf)
-- Class 300D upgraded to BB (sf) from BB (low) (sf)
-- Class 300E upgraded to B (high) (sf) from B (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on December 10, 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 rake bonds are directly tied to 300 North LaSalle, which is a 1.3 million-square-foot (sf) Class A office building in Chicago’s River North submarket. As of January 2020, the building was 95.8% leased with the largest tenants at the property including Kirkland & Ellis LLP (Kirkland) and the Boston Consulting Group (BCG). The $475 million original whole loan was split between three pari passu A notes with a combined original balance of $230.6 million ($100.0 million of which is in the conduit trust) and a $244.4 million B note (rake bond).

The property has won several awards, including a National Association of Industrial and Office Properties (Chicago) Award (2010), Architectural Record Good Design is Good Business Awards (2011), and Urban Land Institute Award (2011). The property is LEED Platinum certified and has received an EnergyStar certificate as well as the Chicago Building Owners and Managers Association Earth Award (2014). The sponsor used loan proceeds, consisting of a $475.0 million mortgage loan along with $381.6 million of borrower equity, to finance the Irvine Company LLC’s (Irvine) $850.0 million acquisition of the property and to fund closing costs and escrows.

Originally constructed in 2009, 300 North LaSalle is a 60-story riverfront building with an extensive amenities package that includes an outdoor public plaza, conference center, onsite bank, cafe, fitness center, steakhouse restaurant, and subterranean valet parking garage that accommodates up to 233 vehicles. The property’s largest tenant at issuance was the international law firm, Kirkland, which composes 52.8% of the net rentable area (NRA). Kirkland has headquartered its global operations at the subject property since 2009 and has a lease scheduled to expire in February 2029. Besides Kirkland, no tenant represents more than 10.0% of the NRA.

The property resides on the banks of the Chicago River in the River North submarket of Chicago, east of Michigan Avenue on the northern edge of the Downtown Loop. Two transit stations, Ogilvie Transportation Center and Union Station, are located one mile south of the subject property, linking the downtown area with commuter trains to the suburbs. Additionally, there are numerous Chicago Transit Authority bus and train lines with stops close to the subject. During warmer months, Chicago Water Taxi operates a commuter boat on the Chicago River, which connects the subject to rail stations as well as North Michigan Avenue.

The sponsor and guarantor for this loan is TILC Operating Properties LLC, an affiliate of Irvine. Established 150 years ago, Irvine is a privately held real estate investment and development company headquartered in Newport Beach, California. The company is one of the largest landowners in California and, throughout its century-long existence, has never defaulted on a loan. The property is managed by Hines, an international real estate firm with 57 years of experience.

The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $40.7 million and a cap rate of 7.25% was applied, resulting in a DBRS Morningstar Value of $562.0 million, a variance of -34.0% from the appraised value of $851.0 million. The DBRS Morningstar Value implies an LTV of 83.7% compared with the LTV of 55.3% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -11.6% variance from the Issuer’s NCF, primarily driven by tenant improvements/leasing commissions (TI/LCs), vacancy, and straight-line rent credit. As of the trailing 12-month period ended June 30, 2019, the servicer reported a NCF figure of $44.3 million, a -8.7% variance from the DBRS Morningstar NCF figure, primarily a factor of TI/LCs.

The cap rate DBRS Morningstar applied is in the middle of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s strong occupancy, superior quality, and favorable location within the market. In addition, the 7.25% cap rate DBRS Morningstar applied is above the implied cap rate of 5.4% 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 4.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other positive adjustments to account for certain loan amortization.

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.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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