DBRS Morningstar Confirms All Classes of Wells Fargo Commercial Mortgage Trust 2014-LC18
CMBSDBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC18 issued by Wells Fargo Commercial Mortgage Trust 2014-LC18 as follows:
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PEX at A (sf)
-- Class X-B at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)
All trends are Stable.
The rating confirmations reflect the overall stable performance of the transaction since DBRS Morningstar’s last review in November 2022. DBRS Morningstar notes the transaction does contain loans collateralized by office properties and other assets exhibiting performance declines since issuance or otherwise demonstrating increased risks. For those loans showing the most pronounced risks, stressed scenarios were applied to increase the expected losses. Loans collateralized by office properties constitute 13.5% of the pool balance, including 2900 Fairview Park Drive (Prospectus ID#4; 4.4% of the pool), One Towne Square (Prospectus ID#7; 3.7% of the pool), and YRC Headquarters (Prospectus ID#13; 2.1% of the pool). The analyzed weighted-average expected loss for these office loans was approximately 70% higher than the average expected loss for the pool. These scenarios increased the expected loss for the pool, but the effects were moderate as the transaction also benefits from the stable performance of loans backed by retail and lodging properties, which account for 29.0% and 14.4% of the pool balance, respectively.
As of the March 2023 remittance, 82 of the original 99 loans remain in the pool, representing a collateral reduction of 26.6% since issuance with a current trust balance of approximately $835.2 million. Fifteen loans, representing 13.9% of the current pool balance, are fully defeased. In total, three loans, representing 4.6% of the pool, are in special servicing. Nine loans, representing 11.8% of the pool balance, are on the servicer’s watchlist, with seven of those loans being monitored for occupancy issues as well as low debt service coverage ratios (DSCRs).
The largest office loan in the pool, 2900 Fairview Park Drive (Prospectus ID#4; 4.4% of the pool), is secured by a 147,000 square foot (sf) office building in Falls Church, Virginia. As of September 2022, the loan reported a DSCR of 2.18 times (x), compared with the YE2021 DSCR of 2.12x and DBRS Morningstar DSCR of 1.37x. The subject property is solely occupied by HITT Contracting, Inc. (lease expiry in September 2024), with the single tenant exposure presenting obvious concerns about rollover risk as the loan matures in the same month as the lease expiry date. The subject property serves as the corporate headquarters for HITT, which has invested $12.5 million toward its build-out and has two five-year extension options remaining. The loan is structured with a full cash flow sweep that will be triggered if the tenant does not renew at least 12 months prior to lease expiration. At issuance, it was noted the cash sweep was expected to net slightly more than $3.0 million in funds to be held as additional collateral on the loan or to fund leasing costs to backfill the space. According to Q4 2022 Reis data, the Marrifield and Annandale submarket reported a 15.3% vacancy rate, suggesting that re-leasing such a large block of space could be challenging. Given these increased risks, the loan was analyzed with an increased probability of default to increase the expected loss in the analysis.
The largest office loan on the servicer's watchlist, YRC Headquarters (Prospectus ID#13; 2.1% of the pool), is secured by a 332,937sf office property built in 1972 in the Kansas City suburb of Overland Park, Kansas. The property’s single tenant, YRC Enterprise (YRC; lease expiry in March 2024) expanded into Nashville and officially moved its headquarters, formerly housed at the subject property, there in 2021. The subject building has been fully vacant for at least a year, with all space listed as available in online listings located by DBRS Morningstar as of April 2023. The building is well situated within Overland Park, just south of I-435 on Roe Avenue, a heavily trafficked thoroughfare. A cash sweep was initiated when the YRC lease was not renewed and, as of March 2023 loan reserve report, there is approximately $1.9 million in tenant reserves. According to Q4 2022 Reis data, the South Johnson County submarket reported a 10.5% vacancy rate, compared with YE2021 vacancy rate of 12.0%. Given the significantly increased risks for this loan, DBRS Morningstar assumed a stressed scenario to increase the expected loss, which was 300% higher than the pool average expected loss.
The largest loan in special servicing, Hilton Garden Inn Austin Northwest (Prospectus ID#16; 2.0% of the pool), is secured by a 138-room hotel in Austin, Texas. This loan has been in special servicing since May 2020 but is expected to return to the master servicer in the near term as a forbearance agreement has been reached. According to the STR report, the hotel reported an occupancy rate of 70.2%, average daily rate (ADR) of $101.88, and revenue per room (RevPAR) of $71.51 for March 2022, showing improvement from the YE2021 occupancy rate of 41.5%, ADR of $69.73, and RevPAR of $28.94. The performance improvements had a positive impact on the financials, with the DSCR of 0.87x reported for the trailing nine months ended September 30, 2022, compared with the DSCR of 0.34x at YE2021 and DSCR of 1.67x at issuance. A December 2022 appraisal, obtained by the servicer, reported a value of $18.5 million for the property, a slight decline from the February 2022 appraised value of $18.6 million, and a 39.4% decrease from the $30.4 million value at issuance. Given the decline from the appraised value and the low in-place DSCR, DBRS Morningstar analyzed the loan with a stressed scenario to increase the expected loss.
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 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/396929 (May 17, 2022).
Classes X-A, X-B, 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.
Notes:
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.
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
Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008
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 (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153
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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