DBRS Confirms All Classes of COMM 2014-UBS2 Mortgage Trust

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS2 issued by COMM 2014-UBS2 Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (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 March 2014 with 59 fixed-rate loans secured by 95 commercial properties. Since issuance, the transaction has experienced collateral reduction of 2.9% as a result of scheduled amortization, with all of the original 59 loans remaining in the pool. The transaction is reporting a weighted-average (WA) DSCR of 1.50 times (x) and a WA debt yield of 9.4% based on 86.7% of the loans reporting YE2014 financials. The top 15 loans in the pool are reporting a WA amortizing DSCR of 1.29x and a WA debt yield of 8.6%. The YE2014 performance metrics for the overall pool compares with the DBRS underwritten DSCR and debt yield at issuance of 1.37x and 8.7%, respectively.

As of the November 2015 remittance, there is one loan in special servicing, representing 2.0% of the current pool balance. There are also six loans on the servicer’s watchlist, representing 6.9% of the current pool balance.

The specially serviced loan is Prospectus ID#15, Creekside Mixed-Use Development. This loan is secured by a Class A, mixed-use property located in Gahanna, Ohio, just eight miles northeast of the Columbus central business district. The property is comprised of approximately 39,000 square feet (sf) of retail space, approximately 58,000 sf of office space and 84 multifamily units. The project was originally developed in 2007 as part of a revitalization project for the downtown area of Gahanna, also known as Olde Gahanna. The multifamily units were originally developed as condominiums, but unit sales struggled and commercial leasing was slow as the property came on line in the midst of the recession. The struggle to stabilize continued and in 2011, the prior lender foreclosed. The current borrower purchased the property in 2013 out of receivership and was able to stabilize performance following a renovation project that finished incomplete interior space left by the prior ownership and converted the condominium units to multifamily. The project cost approximately $19.2 million, bringing the total cost basis to approximately $30.0 million for the borrower. The subject loan refinanced existing debt of $21.4 million with the remaining proceeds used to pay contractor fees and to fund upfront reserves totaling $1.2 million.

This loan was transferred to special servicing in November 2014 due to imminent default. The borrower stopped making payments as of August 2014 as a result of an ongoing dispute with the lender regarding the release of reserve funds held since issuance. The servicer requested additional information to support the borrower’s request for the release of funds. The requested information was not submitted and the funds were not released, prompting the borrower to initiate litigation against the servicer. A foreclosure suit was filed in December 2014 and a receiver was appointed in March 2015. Following the loan’s transfer to special servicing, the special servicer determined that lease terms at the subject had been renegotiated by the former property management, resulting in in-place rental rates contracted to be lower than those in place at issuance. In addition, prospective tenants were lost as the borrower was unable to pay for the requested build-outs and rent concessions were provided to tenants who completed their own build-outs. Occupancy has declined slightly year over year from June 2014 when the subject was 100% occupied to an overall 94.7% occupancy at June 2015. The multifamily portion of the property is 96.6% occupied while the retail/office portion is 90.2% occupied. Overall, the net cash flow has decreased by 87.6% from the DBRS underwritten figure since issuance, leading to a decline in the in-place DSCR to 0.97x at Q2 2015 compared with the DBRS underwritten term DSCR of 1.31x and the Issuer’s underwritten DSCR of 1.42x.

The original April 2014 appraisal valued the property at $33.8 million. The special servicer has not obtained or provided an updated value for the property as of the November 2015 remittance report — given the decline in cash flows, DBRS believes it is likely the value has declined from the issuance figure. As the resolution for this loan remains in limbo, DBRS has modeled the loan with a loss based on a conservative estimate of value for the purposes of this review.

The largest loan on the watchlist is Prospectus ID#10, Valley Forge Shopping Center, representing 2.8% of the current pool balance. This loan is secured by a 340,352 sf anchored retail center located in King of Prussia, Pennsylvania, which is approximately 18 miles northwest of Philadelphia. The loan was structured with a one-year interest-only period that ended in March 2015. This loan was placed on the watchlist as a result of a low DSCR, which fell to 0.56x at YE2013. Coverage has steadily increased since that time, with the amortizing YE2014 DSCR at 0.87x and the Q2 2015 amortizing DSCR at 1.01x. The property’s cash flows were impacted with the ongoing construction of the Target space (which occupies 50.7% of the net rentable area on a ground lease through January 2040) and the reconfiguration of approximately 15,000 sf of space to accommodate a new tenant in PetSmart. The construction work for those projects was in progress at issuance and the Target space is now complete, delivered in April 2014, with the PetSmart space to be completed in the near term. The annualized Q3 2015 in-place DSCR shows improvement to 1.24x, in line with the DBRS Term DSCR of 1.23x. Occupancy for the period was reported at 92%, in line with the levels at issuance. Given the improvement in cash flows, DBRS expects the loan will be removed from the watchlist in the near term.

Prospectus ID#17 L.A. Fitness, representing 1.3% of the current pool balance, is secured by three single-tenant buildings occupied by L.A. Fitness for a total of 137,552 sf. Two are located in Lexington, Kentucky, and one is located in Antioch, Tennessee, a Nashville suburb. This loan was placed on the watchlist as the L.A. Fitness located in Antioch has gone dark. As a result, physical occupancy of the portfolio has declined to 76.2%. The Antioch lease was originally set to expire in January 2021. At issuance, DBRS was aware that a Planet Fitness was scheduled to open in the area, noting it could have a negative effect on the performance of the collateral property. The DBRS underwritten term DSCR for the loan was 1.54x — removing the income for the Antioch property implies an estimated DSCR of 1.02x. DBRS has requested confirmation that L.A. Fitness continues to pay rent on the dark space and has requested an updated DSCR calculation for the loan from the servicer. The response is pending as of the date of this press release.

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.