DBRS Assigns Provisional Ratings to LSTAR Commercial Mortgage Trust 2014-2

DBRS has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-2 (the Certificates), to be issued by LSTAR Commercial Mortgage Trust 2014-2. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All classes will be privately placed pursuant to Rule 144A.

The Class X-A and X-B balances are notional. DBRS ratings on interest-only certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the interest-only certificates’ position within the transaction payment waterfall when determining the appropriate rating.

The collateral consists of five newly originated loans (four fixed and one floating rate) secured by six properties and 206 seasoned floating-rate loans that were either purchased by Lone Star from Fannie Mae or originally part of the following now retired commercial mortgage-backed security (CMBS) transactions: LASL 2006-MF2 and LASL 2006-MF3. The seasoned loans are secured primarily by multifamily properties, with only 15.0% of the seasoned loans secured by mobile home communities. All loans were analyzed to determine the provisional ratings, which reflect the long-term probability of loan default within the term and the refinance risk at maturity for 49.4% of the loans that were not fully amortizing, based on a fully extended loan term. Due to the floating-rate nature of 55.3% of the pool, the interest rate was modeled based on a DBRS stressed index, subject to the life cap and floor rates when applicable. Additionally, to assess refinance risk for those loans that are not fully amortizing given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts; this resulted in five loans representing 30.1% of the pool having refinance debt service coverage ratios (DSCR) below 1.00 times (x). These five loans, representing 43.5% of the pool, are newly originated loans.

The five newly originated loans are concentrated, with the largest two loans representing in excess of 10.0% of the pool each at 13.5% and 12.8%, respectively. Nevertheless, the 206 seasoned loans are very granular, with only one loan representing more than 1.0% of the pool (1.3%). The outstanding loan balances of the seasoned collateral range in size from $3.7 million to less than $125,000. The average loan balance of the seasoned collateral is $770,856.

The seasoned loans have an average seasoning of 96 months. All of the loans in the pool are current and none of the loans have ever been more than 60-days delinquent over the past 36 months. Only one loan (representing 0.4% of the pool) has been 30-days delinquent over the past 36 months. Additionally, loans that fully amortize over their respective loan terms represent 50.6% of the pool, eliminating refinance risk. The Relius-originated and seasoned loans’ amortization is estimated at 5.1% and 95.7%, respectively. While the pool suffers from interest rate risk, as loans representing 55.3% of the pool have floating interest rates that adjust periodically during the loan term, DBRS modeled the floating-rate loans with an average stressed index of 4.33%, which represents a stress of 4.0% (six month LIBOR) and 3.3% (one month LIBOR) over the current indices when added to the loan’s margins, resulting in an average stressed interest rate of 7.0%. 99.5% of the floating-rate loans have an interest rate floor, which, when the loan margins are deducted, implies an index floor that is on average more than 3% above the current relevant LIBOR index. These floors serve to insulate the current debt service payment from much of the modeled interest rate stress.

The transaction structural features for this deal are viewed as less desirable than what is considered the norm in transactions securitized post-2010. Specifically, affiliates of Lone Star are both the mortgage loan seller and special servicer, and appraisal reduction amounts are not deducted from outstanding principal certificate balances when determining if a Control Termination Event has occurred in order to remove control from a party that no longer has an economic interest in the transaction. The seasoned multifamily loans have representations and warranties that are limited in scope but generally in line with expectations for seasoned collateral, with the exception of those representations dealing with insurance and property condition. The insurance representation for seasoned loans states that all properties are insured for fire, hazard and commercial general liability insurance, but no mention is made with respect to earthquake, windstorm and flood coverage. The property condition representation for seasoned loans includes a qualifier to the loan seller’s knowledge, but the loan seller did not perform inspections on any of the properties securing the seasoned loans, instead reviewing site inspections conducted prior to the acquisition of the loans.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Other Research or by contacting us at info@dbrs.com.

The applicable methodology is CMBS Rating Methodology, which can be found on our website under Methodologies.