DBRS Confirms Ratings of Morgan Stanley Bank of America Merrill Lynch Trust 2014-C19, Stable Trends

DBRS, Inc. (DBRS) has today confirmed the ratings for all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-C19 (the Certificates) issued by Morgan Stanley Bank of America Merrill Lynch Trust 2014-C19 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-C at AAA (sf)
-- Class X-D at AAA (sf)
-- Class X-E at AAA (sf)
-- Class X-F at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PST 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. Classes D, E, F, G, X-B, X-C, X-D, X-E, X-F and X-G will be privately placed pursuant to Rule 144A.

Up to the full certificate balance of the Class A-S, Class B and Class C certificates may be exchanged for Class PST certificates. Class PST certificates may be exchanged for up to the full certificate balance of the Class A-S, Class B and Class C certificates.

This transaction closed on December 19, 2014, and comprises 77 fixed-rate loans secured by 114 commercial properties. The pool is most concentrated by retail (25.5% of the pool), office, (24.0% of the pool), multifamily (17.2% of the pool) and hotel (16.9% of the pool) property types. Approximately 48.9% of the pool is found in five states (Florida, New York, Texas, Massachusetts and Georgia). There are three loans (17.4% of the pool) with pari passu debt: 300 North LaSalle (Prospectus ID#2, 8.9% of the pool), Linc LIC (Prospectus ID#5, 4.8% of the pool) and One & Only (Prospectus ID#8, 3.7% of the pool). Seven loans (20.5% of the pool) are structured with full interest-only (IO) terms, while an additional 36 loans (48.2% of the pool) are structured with partial interest-only periods. The transaction benefits from a concentration of high-quality properties, as DBRS considers two loans (12.7% of the pool) to be secured by properties with Excellent property quality, and an additional three loans (12.2% of the pool) to be secured by properties with Above Average property quality. However, seven loans (27.0% of the pool) have sponsors that have had bankruptcies, foreclosures or limited net worth/liquidity. DBRS modeled these loans with an elevated probability of default (POD) to mitigate this risk.

The rating confirmations reflect the current performance for the pool, which is stable from issuance, with cash flows generally in line with the DBRS underwritten (UW) levels. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.67 times (x) and 9.5%, respectively. As of the November 2015 remittance, 77.2% of the pool reported 2015 cash flows (most being Q2 2015 figures), and for those loans, the annualized WA DSCR and WA debt yield were 1.85x and 10.8%, respectively. All 77 loans remain in the pool, with an aggregate balance of $1.46 billion, representing a collateral reduction of 0.42% since issuance due to scheduled amortization. For 14 loans reporting 2015 financials in the Top 15, the WA amortizing DSCR was 1.92x, with a WA net cash flow (NCF) growth from the respective DBRS UW figures of 14.7%.

There are two loans in the Top 15 showing negative NCF growth from the DBRS UW figures (as based on the most recent NCF figure reported for each respective property by the servicer), with a range of -1.8% to -32.8%. These two loans, the PacStar Retail Portfolio (Prospectus ID#9, 3.5% of the pool) and Park at Caldera (Prospectus ID#12. 2.4% of the pool) are secured retail and multifamily properties. DBRS has highlighted the Park at Caldera below, as the loan has recently experienced a decline in performance.

The Park at Caldera loan is secured by a 358-unit garden-style apartment complex located in Midland, Texas. The property was originally developed in 1982 and consists of 26 two-storey apartment buildings and one clubhouse/leasing office. The unit mix at the subject consists of 34 studio, 166 one-bedroom and 158 two-bedroom units, with amenities that include two outdoor swimming pools, laundry facilities and picnic/park areas with available barbecues. This loan has a ten-year term, structured with a five-year IO period. The loan is sponsored by an affiliate of Starwood Capital Group, which currently manages over $36 billion worth of assets, including multifamily, hotels and industrial space. Starwood acquired the subject property for $46.5 million and retained cash equity of $13.8 million at loan closing.

As of Q2 2015, Park at Caldera had an annualized NCF reflective of a DSCR of 1.11x compared with the DBRS UW DSCR of 1.47x. Since issuance, the effective gross income has seen an 8.0% ($400,000) decline because of a loss in rental revenue, while total operating expense increased by 25.0% ($500,000), primarily as a result of increases in Repairs and Maintenance (58.0%), Utilities (75.0%) and General and Administration (72.0%). DBRS has requested an update regarding a breakout of the categories contributing to the increase in expenses and is awaiting the servicer’s response. According to the September 2015 rent roll, the property was 94% occupied with an average rental rate of $955 per unit compared with occupancy of 91% with an average rental rate of $1,154 per unit in October 2014. REIS reports that, as of Q3 2015, multifamily properties in the Midland-Odessa metro were achieving an average rental rate of $1,110 per unit with a vacancy rate of 10.0%. At issuance, DBRS noted that the subject’s overall physical condition suffered by comparison within its competitive set and would likely require a large amount of capital in order to retain appeal within in the market. Additionally, the Midland-Odessa area is home to the Permian Basin, an area which relies almost entirely on the oil and gas industry. Given the current difficulties in the global energy markets, the local economy will likely remain in contraction for the foreseeable future, hampering the subject’s ability to reverse the declining rental rate trends. DBRS modeled this loan with an elevated POD, because of the volatile nature of the market and the property’s high operating expense ratio.

As of November 2015 remittance, there are no loans in special servicing and five loans (14.2% of the pool) on the servicer’s watchlist. Two of these loans, TKG Retail Portfolio (Prospectus ID#3, 7.4% of the “tax monitoring,” respectively; both are current. The third and fourth loans, Victory & Tampa Shopping Center (Prospectus ID#14, 2.0% of the pool) and 756 Old State Office (Prospectus ID#70, 0.2% of the pool) were flagged in August 2015 for upcoming rollover. All tenants of concern have renewed with new leases executed or pending execution.

The fifth loan on the servicer’s watchlist, Jordan Gateway III (Prospectus ID#29, 0.8% of the pool), is secured by an 89,590-square foot office property located in South Jordan, Utah, which is approximately 17 miles south of Salt Lake City. The property is currently 100% leased to three tenants -- MarketStar Corporation (41.0% (net rentable area) NRA)), Progressive Finance, (33.0% NRA) and State Farm Insurance (26.0% NRA) -- with lease expirations as of March 2016, March 2019 and July 2017, respectively. The loan was flagged in October 2015 for the upcoming lease expiration for the largest tenant, MarketStar Corporation. According to CoStar, 7.5% of the NRA of that tenant’s space (one unit) is currently being marketed as available. As of Q3 2015, CoStar reports that office properties within the Sandy South Towne submarket were achieving average rental rates of $22.78 per square foot with a reported vacancy of 3.6%. The subject property’s occupancy rate has historically fluctuated from 67% to 100% between 2011 and 2015. At issuance, DBRS modeled a term DSCR and term debt yield of 1.42x and 8.6%, respectively. For the purposes of this review, DBRS modeled a stressed NCF figure to account for the rollover risk with the property’s largest tenant.

At issuance, DBRS assigned an investment-grade shadow rating to one loan, 300 North LaSalle (Prospectus ID#2, 8.9% of the pool). DBRS has today confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

For more information on these rating actions, please contact us at info@dbrs.com.

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 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.