DBRS Confirms All Classes of Wells Fargo Commercial Mortgage Trust 2014-LC18 with Stable Trends

DBRS, Inc. (DBRS) has today confirmed the ratings for all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC18 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2014-LC18. The ratings are listed below; all trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-E at AAA (sf)
-- Class X-F at AAA (sf)
-- Class X-G 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 (low) (sf)
-- Class F at B (low) (sf)

Classes X-E, X-F, X-G, D, E, F and G have been 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 PEX certificates (and vice versa).

This transaction closed on December 30, 2014, and is comprised of 99 fixed-rate loans secured by 117 commercial properties. The property type with the largest concentration in the pool is retail, with 27.0% of the pool balance, followed by hospitality with 20.7% and office with 12.1%. The pool is well diversified by location, with no state representing more than 9.8% of the transaction balance. The three states with the highest concentration levels are California (9.8%), Texas (9.7%) and Virginia (8.9%). There are three loans (9.7% of the pool) with pari passu debt in Prospectus ID#2, JW Marriot New Orleans; Prospectus ID#6, Colorado Mills; and Prospectus ID#12, Depot Park. There are 14 loans (13.9% of the pool) with full interest-only (IO) structures and an additional 31 loans (43.1% of the pool) that have partial IO structures.

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 levels. As of the December 2015 remittance report, the in-place weighted-average debt service coverage ratio (DSCR) for the pool was 1.76 times (x), with a weighted-average debt yield of 10.2%. All 99 loans remain in the pool, with collateral reduction of 0.79% since issuance. Given the late 2014 closing date, year-end reporting for the pool is limited, but a year-to-date (YTD) report for 2015 was available (primarily for Q2 2015) for 93 loans, representing 93.9% of the pool. For the loans in the top 13, the YTD 2015 financials show a weighted-average amortizing DSCR of 2.03x, with a weighted-average net cash flow (NCF) growth from the respective DBRS underwritten figures of +18.23%. The strong overall growth from the DBRS underwritten figures is partially attributable to the fact that the annualized figures for the hotel loans in the top 13 represent a partial year that includes peak months of operations, inflating cash flows on an annualized basis. The NCF growth over the DBRS underwritten figures is also reflective of some loans that were underwritten more conservatively at issuance by DBRS to account for tenant rollover over the loan term, for single-tenant properties or soft market conditions in-place at issuance.

There are six loans on the servicer’s watchlist, representing 2.14% of the pool balance, as of the December 2015 reporting, with no loans in special servicing. Three of the loans on the watchlist were added for delinquent financial reporting and the other three are being monitored for cash flow decline loans (from the underwritten levels). The servicer notes that the calculated NCF figures for two of those — Prospectus ID#49, Lorenzo Manor Shopping Center and Prospectus ID#99, 17-19 East 95th Street Tenants Corporation — are likely artificially low due to issues with the respective borrower’s reporting that may not include all revenues.

The largest loan on the watchlist is Prospectus ID#44, Four Corners Shopping Center (0.76% of the pool), which is being monitored for the decline in DSCR to 1.08x at Q3 2015 as compared to the Issuer’s underwritten DSCR of 1.57x. The loan is secured by an anchored retail property in Concord, California, approximately 25 miles northeast of Oakland. The property’s occupancy rate was reported at 93% for the reporting period, down from 100% at issuance; however, the reported YTD revenue figure represents improvement of approximately +22% over the underwritten levels, due to scheduled rental rate increases and increases in other income. The decline in cash flows is related to expense increases in repairs and maintenance, general and administrative, utilities and professional fees, according to the servicer. As the NCF figure is based on partial year report dated less than 12 months after the loan’s closing, DBRS believes the income figures are likely inflated on an annualized basis and likely include one-time expenditures related to the refinance by the borrower in 2014. DBRS will monitor the loan for developments as it remains on the servicer’s watchlist.

Prospectus ID#6 (3.19% of the pool), Colorado Mills, is secured by a 1.1 million square foot (sf) mall located in Lakewood, Colorado, a Denver suburb. This is a typical “Mills” development with a mix of regular and outlet space tenants, as well as some non-traditional tenants, such as Jumpstreet (an indoor trampoline park) and Putting Edge (an indoor putting green park). As of the September 30, 2015, reporting period, the in-place DSCR on the IO debt service obligation, which lasts through the first three years of the loan term, was 2.72x, with the overall occupancy at 89%. Based on the amortizing debt service figure, the DSCR would be 2.00x. The September 30, 2015, annualized NCF figure represents an 11.4% increase over the DBRS underwritten NCF figure. As of the trailing 12 months (T-12) sales report for October 2015, tenants with less than 10,000 sf averaged sales of $361 per sf (psf) (+5.2% year over year) and tenants greater than 10,000 sf averaged $165 psf (+1.2% year over year). United Artists averaged $364,875/screen, up 6.2% over the previous T-12, according to the report.

At issuance, DBRS noted the lack of sit-down dining options at the property, citing a lack of parking as a driver. According to news reports, Red Robin and Racca’s Pizzeria Napolentana (Racca’s) have signed at the property since issuance — Red Robin opened in November 2015 and Racca’s is scheduled to open in early 2016. DBRS also noted plans by the loan’s sponsor, Simon Malls, to construct an outlet mall approximately 25 miles north of the subject property. News outlets report that the sponsor has secured tax incentives for developing that mall and construction is to begin in the near term, with an opening expected in late 2017. DBRS believes the impact to the subject will be minimal, as the new mall would be located much farther out than the existing infrastructure and shopper base.

The seventh-largest loan in the pool, One Towne Square (Prospectus ID#7, 3.14% of the pool), is secured by a 427,000 sf Class A office property located in Southfield, Michigan, approximately 17 miles northwest of Detroit. At issuance, DBRS noted increased risk for this loan with the soft market conditions and vacancy rates hovering near 20%, and near-term rollover for the property with Baker Tilly Virchow Krause (Baker Tilly), the largest tenant at 11.7% of the net rentable area (NRA), on a lease expiring in May 2016. The Q2 2015 DSCR was 1.69x, with occupancy flat from issuance at 90%. The NCF figure represents an improvement of +60% over the DBRS underwritten figure. The drivers for the improvement are in the higher-than-in-place vacancy figure underwritten by DBRS and mark-to-market adjustments for tenants paying greater than 110% of the appraiser’s estimated market rental rate. Those adjustments included a markdown of the largest tenant’s rent, which was deemed significantly above the market estimate.

At issuance, it was known that Baker Tilly intended to vacate a portion of their space at lease expiry; that space amounts to approximately 5.5% of the NRA and is listed for lease on CoStar, which shows availability for the property of 13.5% and a leased rate of approximately 95%. Market vacancy levels remain in line with those in place at issuance, with CoStar showing the 38 Class A properties within a five-mile radius of the subject property at an overall vacancy rate of 20.4%, with availability at 27.8% as of December 2015. The remaining space leased by Baker Tilly outside of the known space to be vacated is not listed, but the renewal status is unknown at this time. DBRS has requested an update from the servicer and will monitor for developments.

For more information on this rating action, 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.