DBRS Confirms Ratings of LCCM 2014-909 Mortgage Trust

DBRS, Inc. (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates) issued by LCCM 2014-909 Mortgage Trust, as follows:

-- Class A 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 (low) (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction, which remains in line with DBRS expectations since issuance in June 2014. The collateral consists of the leasehold interest in a Class- A LEED Silver certified office building located in the Plaza District in Manhattan. At YE2015, the subject was 95.6% occupied, a decrease from the 99.9% occupancy rate in the October 2015 rent roll as a result of CitiBank vacating its space at lease expiration in November 2015. The largest tenant continues to be the United States Postal Service (USPS), which occupies 34.7% of the net rentable area (NRA) into October 2018. Inclusive of four five-year extension options, the USPS lease extends into October 2038.

The property benefits from a concentration of investment-grade tenants as 71.3% of the NRA is leased by investment-grade tenants, including the USPS, CMGRP, Inc., Forest Laboratories, Inc., Robeco Investment Management, Inc. and Procter & Gamble Distributing, LLC. These tenants provide stable cash flow to the subject. As of Q3 2015, the transaction reported an annualized debt service coverage ratio (DSCR) and debt yield of 2.26 times (x) and 9.0%, respectively, which compares similarly to the YE2014 DSCR and debt yield of 2.11x and 8.3%, respectively.

Upcoming tenant rollover throughout 2016 may potentially increase vacancy further as Allegheny Energy Services (Allegheny; occupying 3.5% of the NRA) and Bloomingdale’s Inc. (Bloomingdale’s; occupying 1.4% of the NRA) are vacating their spaces at lease expiration in July 2016 and December 2016, respectively. According to the servicer, the sponsor, Vornado Realty Trust is reserving funds equal to $15 per square foot (psf) to prepare and demolish the spaces once each tenant vacates. DBRS is awaiting confirmation from the servicer that Vornado is employing the same strategy with the former CitiBank space. No other leases expire until 2018. According to CoStar, Class A office buildings in the Plaza District submarket report a vacancy rate of 6.4%, an availability rate of 7.2% and quoted rents of $71.87 psf gross. There is potential rental revenue upside associated with the expired and expiring leases as CitiBank, Allegheny and Bloomingdale’s paid gross rental rates of $53.00 psf, $72.00 psf and $57.00 psf, respectively.

The largest tenant, USPS, pays below-market rent of $2.23 psf net compared with the weighted-average in-place rent of $54.60 psf for all other tenants at the subject. The tenant has been at the subject since it was originally constructed in 1968, occupying the two subterranean floors through to the fourth floor. It uses its space for multiple uses including truck parking and loading, mail sorting and a retail post office location. While DBRS does not consider this space to be easily converted to office space due to the lack of windows and high ceilings, individual spaces would likely command higher rental rates than currently being paid if the USPS vacated ahead of its fully extended lease expiration date in October 2038. At issuance, DBRS conservatively estimated a market rental rate of $30.00 psf gross for the entire space, which would result in approximately $9.9 million in additional rental revenue.

The total loan exposure of $261 psf is considered very low compared to the value of the collateral, which was appraised at $700.0 million ($521 psf) at issuance. According to Real Capital Analytics, there were 14 office building transactions in 2015 within a half mile of the subject. These properties sold at an average prices of $1,088 psf, ranging from $484 psf to $$2,158 psf.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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