DBRS Confirms Ratings on FREMF 2014-K37 Mortgage Trust, Series 2014-K37

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates issued by FREMF 2014-K37 Mortgage Trust, Series 2014-K37 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class X1 at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class X2-B at AAA (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS expectations. At issuance, the collateral consisted of 102 fixed-rate loans secured by 102 multifamily properties. As of the December 2015 remittance, the pool balance was approximately $1,344 million, representing a collateral reduction of 1.5% since issuance due to scheduled loan amortization. Loans representing 97.7% of the pool are reporting year-end (YE) 2014 financials and 81.4% are reporting 2015 partial-year financials. Based on the YE2014 reporting, the pool had a weighted-average (WA) debt service coverage ratio (DSCR) of 1.55 times (x) and a WA debt yield of 9.8%, which are above the DBRS underwritten figures of 1.39x and 8.7%, respectively.

As of the December 2015 remittance, there are no delinquent or specially serviced loans; however, four loans are on the servicer’s watchlist, representing 3.3% of the current pool balance. Three of the watchlist loans are detailed below.

Vinings Corner (Prospectus ID#12, 2.0% of the current pool balance) is secured by a 360-unit garden-style apartment complex located in Smyrna, Georgia. This loan was placed on the watchlist in November 2014 due to an insurance loss as a result of a fire, which occurred in August 2014. The fire affected nine units in which all displaced tenants were temporarily moved to other units at the property. According to the borrower, reconstruction costs are estimated to be over $900,000, which is below the Blanket Property Coverage limit of $250 million. Reconstruction work began in January 2015 with a targeted completion date of June 2015. As per the October 2015 site inspection, the property was in average condition and no down units were identified. While it appears the reconstruction may now be completed, DBRS has requested a status update regarding whether the completion deadline was met. Occupancy increased from 92.5% at YE2014 to 96.4% with an average rental rate of $964.64 per unit, according to the September 2015 rent roll. The subject property has been performing slightly above the Smyrna submarket, as the Q3 2015 average vacancy rate was 4.1% and average rental rate was $943 per unit, as reported by Reis. According to YE2014 reporting, the DSCR was 1.55x, which is above the DBRS underwritten level of 1.25x. DBRS has requested updated 2015 financials and is currently awaiting a response.

Green Lake Apartments (Prospectus ID#61, 0.6% of the current pool balance) is secured by an 82-unit multifamily co-op property located in Orchard Park, New York. It was built in 1968 and renovated in 2010. This loan was placed on the watchlist because nine units were damaged by a fire in February 2015. The estimated cost to demolish and rebuild the affected units is $1.2 million and, according to the servicer, will be fully covered by insurance proceeds. According to the servicer, the insurance coverage amount is approximately $8.2 million, which is well above the estimated restoration cost. Reconstruction will begin once the appropriate building permits are received by the borrower. Initially, the borrower targeted a completion date of February 2016, but it is uncertain whether the deadline will be met, since no further updates were made available. DBRS has requested details regarding the timeline surrounding the reconstruction, as well as the anticipated completion date. The servicer stated that a business interruption claim has been filed to cover the loss of rents and DBRS requested a confirmation whether proceeds were disbursed.

According to the November 2015 rent roll, occupancy dropped to 82.9% from 96.3% at YE2014 and the average rental rate was $1,229 per unit. In comparison to the South Buffalo submarket, the Q3 2015 average rental rate was $786 per unit, which is below the subject’s rental rate; however, the subject property’s vacancy rate of 17.1% is significantly above the submarket’s vacancy rate of 1.8%. According to the Q3 2015 OSAR, the annualized DSCR was 1.15x, which is above the YE2014 DSCR of 1.08x but below the DBRS underwritten level of 1.30x. The main drivers for a depressed YE2014 DSCR are slight decreases in parking and other income, as well as large increases in repairs and utilities expenses. Given the decline in occupancy and increased cash flow volatility associated with repairing the down units, DBRS modeled this loan with an elevated probability of default.

Kaal Rock Manor Apartments (Prospectus ID#74, 0.5% of the current pool balance) is secured by a 114-unit multifamily property located in Poughkeepsie, New York. This loan was placed on the watchlist because 12 units were damaged by a fire that occurred in February 2015. According to the borrower, the total loss was approximately $1.5 million and thus far, the borrower has received $250,000 of insurance proceeds and has started the reconstruction on affected units. The anticipated completion date is April 2016 and business income insurance proceeds will be supplementing the rental income foregone. As per the October 2015 rent roll, the physical occupancy was 88.6% but the economic occupancy was 99.1%, as the units destroyed by the fire are still listed as rented. The property reported a Q3 2015 annualized DSCR of 1.23x, which is a decrease from YE2014 DSCR of 1.28x and DBRS underwritten DSCR of 1.56x. While recent performance is below DBRS’s expectations at issuance, DBRS did not model this loss with an increased probability of default as a result of the strong economic occupancy rate, which should result in a rebound in performance once the reconstruction is completed.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The December 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact DBRS 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 (December 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.