DBRS Confirms Ratings of WFCM 2014-LC16 Commercial Mortgage Trust, Stable Trends

DBRS Limited (DBRS) has today confirmed the ratings for all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC16 (the Certificates) issued by Wells Fargo Commercial Mortgage Trust 2014-LC16 (the Trust) as follows:

-- 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-C at AAA (sf)
-- Class X-D at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C 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 current performance of the pool, which has been stable from issuance, with cash flows remaining generally in line with the DBRS underwritten (UW) levels. The collateral consists of 82 fixed-rate loans secured by 184 commercial properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.51 times (x) and 9.5%, respectively. As of the January 2016 remittance, 81 loans (94.3% of the pool) reported YE2014 cash flows, while 79 loans (79.3% of the pool) reported partial-year 2015 cash flows (most loans reported a Q3 2015 figure). For the 14 loans reporting 2015 cash flows in the Top 15, the WA amortizing DSCR was 1.52x, with a WA net cash flow (NCF) growth over the respective DBRS UW figures of approximately 8.1%. All 82 loans remain in the pool with an aggregate balance of $916 million, representing a collateral reduction of approximately 1.3% since issuance as a result of scheduled loan amortization. The transaction benefits from a concentration of high-quality properties, as DBRS considers one loan, representing 5.2% of the pool, to be of Excellent property quality, and two loans, representing 8.4% of the pool, to be of Above Average property quality. At issuance, DBRS considered nine loans, representing 11.8% of the pool, to have sponsorship and/or collateral associated with voluntary bankruptcy, a historical negative credit event or minimal experience with the respective property type.

There are four loans in the Top 15, representing 17.3% of the pool, exhibiting negative NCF growth compared with the DBRS UW figures (as based on the most recent NCF figure reported for each respective property by the servicer), with declines ranging from -6.4% to -10.9%. These four loans include Montgomery Mall (Prospectus ID#3, 5.6% of the pool), Pacific Design Center (Prospectus ID#4, 5.2% of the pool), Purgatory Creek Apartments (Prospectus ID#5, 3.3% of the pool) and Weatherford Ridge (Prospectus ID#6, 3.2% of the pool). According to the most recent financials received (ranging from YE2014 to Q3 2015), these loans had a WA DSCR and WA debt yield of 1.64x and 9.1%, respectively, compared with the DBRS UW figures of 1.77x and 9.6%, respectively. DBRS has highlighted the Purgatory Creek Apartments loan below, as it has recently experienced a decline in performance.

The Purgatory Creek Apartments loan is secured by a 286-unit garden-style multifamily property located in San Marcos, Texas, approximately 32 miles southwest of Austin and 48 miles northeast of San Antonio. The luxury apartment complex was completed in 2012 and is located approximately 2.5 miles south of Texas State University (TSU). According to Q3 2015 financials, the loan had a DSCR of 1.08x, a decline in comparison to the DBRS UW figure of 1.18x. The decrease in performance was a result of a marginal decline to the estimated growth income of 2.9% and an increase in operating expenses, which have risen by approximately 11.8% since issuance, primarily because of increases to Repairs & Maintenance (28.9%), Utilities (27.0%), Advertising & Marketing (33.0%) and Payroll & Benefits (5.0%). According to the borrower, the increase was a result of costs associated with several water leaks at the property over the summer, as well as both irrigation and landscaping projects that the borrower undertook in the fall. The borrower reports that the city of San Marcos provided them with a waste water credit in November 2015, and given that these are expected to be non-reoccurring items, expenses have seen a significant decrease as of the Q4 2015 financials. As of the September 2015 rent roll, the property was 94.5% occupied with an average rental rate of $1,219 per unit compared with 94.5% with an average rental rate of $1,221 per unit as of May 2014. According to Reis, as of Q3 2015, the San Marcos/North Hays submarket reported a vacancy rate of 6.6% with an average rental rate of $922 per unit. While the property is operating with rental rates well above its general submarket, it should be noted that at issuance, the appraiser noted that approximately a third of the tenant concentration was drawn from either students (30.0%) or employees (6.0%) from TSU. The appraiser also noted that five developments (1,124 units) were under construction at the time, four of which were considered to be student-housing projects, with expected completion dates in Q4 2014. Historically, TSU has had a positively trending enrollment rate for the past 18 consecutive years, and as of 2015, the school reported that 38,979 students had enrolled compared with total enrollment of 36,764 in the fall of 2014.

As of the January 2016 remittance, there are no loans in special servicing and nine loans, representing 7.1% of the pool, on the servicer’s watchlist. Four of these loans, representing 4.6% of the pool, were flagged because of deferred maintenance items, while one loan, representing 0.6% of the pool was flagged because of upcoming rollover within the next six months. The four remaining loans on the watchlist, representing 3.9% of the pool, were flagged for performance-related reasons. According to the 2015 cash flows reported (both Q2 2015 and Q3 2015), these four loans had a WA DSCR and WA debt yield of 1.32x and 10.4%, respectively, compared with the DBRS UW figures of 1.44x and 11.3%, respectively. DBRS has highlighted the largest loan currently on the watchlist below.

The BLG Industrial loan (1.3% of the pool) is secured by a 600,000-square foot industrial property located in Vance, Alabama, which is approximately 38 miles southwest of Birmingham. The building was constructed in 2004 and was most recently renovated during 2007. The loan was placed on the servicer’s watchlist in February 2015 because of a low DSCR, which was 0.73x as of YE2014. At the time, the decline in performance was a result of a rental abatement and a substantial increase in operating expenses. In February 2014, ARD Logistics signed a seven-year triple-net lease for 49.2% of the net rentable area (NRA) and received an initial four-month rental abatement period, which ended in June 2014. The other 50.8% of the NRA is occupied by BLG Logistics on a triple-net lease through January 2021. At YE2014, operating expenses had increased by approximately 46.0% since issuance, primarily as a result of an increase in Utilities ($450,000). As of Q2 2015, operating expenses remained 61.5% above issuance figures, which was again attributed to a 61.5% increase in Utilities ($592,000), resulting in a DSCR of 0.99x; however, both this figure and the YE2014 figure did not include the full amount of rental reimbursements, which, if included, would total an annualized NCF of approximately $2.7 million. Factoring in these reimbursements, the loan would reflect a DSCR of approximately 1.38x. The loan remains current.

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, the loans in special servicing and the loans on the servicer’s watchlist. The February 2016 Monthly 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.

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.