DBRS Confirms All Classes of WFRBS Commercial Mortgage Securities Trust 2014-LC14

DBRS Limited (DBRS) has today confirmed all classes of WFRBS Commercial Mortgage Securities Trust 2014-LC14 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3FL at AAA (sf)
-- Class A-3FX at AAA (sf)
-- 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 X-B at AAA (sf)
-- Class X-C at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class G.

The rating confirmations reflect the overall stable performance of the transaction as reflected in the most recent debt service coverage ratio (DSCR) and occupancy figures available for the underlying loans. The transaction originally closed in February 2014 and consisted of 71 fixed-rate loans secured by 144 commercial properties. Since issuance, the transaction has experienced a collateral reduction of 1.5% as a result of scheduled amortization, with all of the original 84 loans remaining in the pool. The transaction is reporting a weighted-average (WA) DSCR of 1.80 times (x) and a WA debt yield of 11.2% based on 98.4% of the loans reporting YE2014 financials. Performance is also healthy for the Top 15 loans in the pool, which reported a WA DSCR of 1.64x and a WA debt yield of 9.1%. The YE2014 performance metrics for the overall pool compares with the DBRS underwritten DSCR and debt yield at issuance of 1.54x and 9.6%, respectively. At the time of this DBRS review, 96.1% of the pool was reporting 2015 cash flows (with most loans reporting a Q2 figure), and for those loans, the annualized WA DSCR was 1.74x, with a WA debt yield of 12.0%.

As of the November 2015 remittance, there are eight loans on the servicer’s watchlist, representing 9.4% of the current pool balance; however, two of the loans, representing 1.7% of the pool, are on the watchlist for non-performance issues related to relatively minor deferred maintenance items. As those items are resolved, the loans are expected to be removed from the watchlist. In addition, two of the loans (representing 2.0% of the pool) placed on the watchlist for a decline in cash flows have since shown improved performance with the most recent operating metrics available. As these trends continue, DBRS expects those loans will also be removed from the watchlist.

The largest loan on the watchlist is Prospectus ID #6, Williams Center Towers, representing 3.7% of the current pool balance. This loan is secured by a 765,809-square foot (sf) Class A office complex comprising two buildings located in downtown Tulsa, Oklahoma. The property was 89.0% occupied as of the September 2015 rent roll; at YE2014, the loan reported a DSCR of 1.24x, and the Q2 2015 DSCR was 1.40x. The loan funded the borrower’s refinance of the property, with cash equity of $16.5 million remaining at close. This loan is on the watchlist because the largest tenant, Samson Investment Company (Samson), a Tulsa-based oil and gas driller that recently filed chapter 11 bankruptcy and occupies approximately 266,000 sf, or 32.3% of net rentable area (NRA), gave back one floor (2.6% of NRA) in August 2015. Samson has also provided notice that it will give back another floor (2.5% of NRA) in August 2016. Its lease is set to expire in May 2025 with a rental rate of $14.75 per square foot (psf). The property’s tenancy is generally well diversified, with tenants on the rent roll representing different industries such as the energy, banking and government sectors. The second-largest tenant is Bank of Oklahoma (6.7% of NRA), which has expanded its space to occupy an additional floor (2.5% of NRA) and whose lease expires in September 2020 with a rental rate of $16.00 psf.

Rollover through the next three years is relatively minimal and well distributed, with 3.5%, 1.3% and 5.5% set to expire in 2016, 2017 and 2018, respectively. CoStar shows a vacancy rate of 10.1% and an availability rate of 11.1% for the 12 Class A properties in the Tulsa Central Business District (CBD) as of November 2015. CoStar shows that historically, the subject property has hovered near or even a few percentage points below the Class A vacancy rates within the submarket. For the total footprint of 164 office properties (all classes) shown in the Tulsa CBD, CoStar reports an average vacancy rate of 16.7%, with availability at 18.7% for the same period. Overall vacancy rates for the Tulsa CBD hovered between 16.0% and 17.0% for the past several years before falling below 15.5% for the first time in Q3 2014. However, rates began spiking upward again in Q1 2015 when vacancy increased to 15.8% from 15.4% at YE2014. CoStar forecasts these trends will stabilize over 2016/2017, with overall vacancy rates falling back near 15.0%, and Class A vacancy rates falling between 6.0% and 7.0% by 2018.

According to news reports on Samson’s bankruptcy filing, a proposal for a reorganization plan to reduce the company’s debt will be presented for court approval at the beginning of December 2015. Once the plans are approved, it is possible that the company will be forced to continue to shed expenses and, as a result, would potentially give back more space. According to the terms of the lease, Samson has the option to terminate up to four floors (one at a time with 12 months’ notice) after October 31, 2014. DBRS will closely monitor the situation for developments and will provide updates as received.

Prospectus ID #33 Westridge Apartments, representing 1.0% of current pool balance, is a 96-unit multifamily property located in Williston, North Dakota. Williston is a small community located along the Missouri River in the northwest portion of the state, approximately 225 miles from the capital city of Bismarck. The property was developed in 2012/2013 in response to the oil boom from the Bakken Shale area. The trust loan refinanced the borrower’s existing construction debt on the property with equity of $5.5 million remaining in the transaction. The recent collapse in oil prices means above-average economic difficulty for the area that has affected the property in lower occupancy rates and, subsequently, cash flows. According to the servicer, at Q2 2015, the occupancy had declined to 70.8% compared with the Q2 2014 occupancy of 94.8%, resulting in a drop in DSCR from YE2014 of 2.00x to a Q2 2015 DSCR of 1.60x. Given the difficult economic environment in the oil and gas industry, DBRS anticipates the declined performance metrics will be difficult to reverse and expects the property will continue to experience cash flow declines below the issuer’s underwritten occupancy rate of 90.0%. DBRS has modeled this loan with an increased probability of default and an increased severity of loss for the purposes of this review and will continue to monitor the loan closely for developments.

At issuance, DBRS shadow-rated two loans investment-grade: Prospectus ID #3 The Outlet Collection – Jersey Gardens, representing 6.5% of the current pool balance, and Prospectus ID #4 Westin New York at Times Square – Lease Fee, representing 4.4% of the current pool balance. DBRS confirms with this review that the performance of these loans remains consistent with investment-grade loan characteristics.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report with additional information on the DBRS viewpoint for this transaction, including details on the largest loans in the pool and loans on the servicer’s watchlist. The November 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.