DBRS Confirms Ratings of COMM 2014-UBS3

DBRS Inc. (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS3 (the Certificates), issued by COMM 2014-UBS3 Mortgage Trust, 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-M 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 (sf)
-- Class PEZ at A (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class H. The Class PEZ certificates are exchangeable for the Class A-M, Class B and Class C certificates (and vice versa).

The rating confirmations reflect the overall performance of the transaction, which remains in line with DBRS expectations at issuance. Pool strengths also include a relatively high concentration of loans secured by properties located in urban markets, at 35.60% of the pool balance and a healthy term DBRS debt service coverage ratio (DSCR) of 1.44x. The in-place coverage as of the annualized 2015 year-to-date (YTD) figures shows most loans have experienced growth over the underwritten (UW) figures, with the largest 15 loans in the pool, which represent 74.27% of the current pool balance, showing a weighted-average (WA) of 1.58x, as based on the annualized 2015 figures (most of which are as of Q3), as compared with the DBRS UW WA DSCR for those loans of 1.50x. Based on the annualized YTD 2015 figures and the respective loan balances as of February 2016, the largest 15 loans showed a weighted-average debt yield of 9.02%.

There are challenges in that the pool is concentrated by loan size, with the largest ten loans comprising 62.00% of the pool, and there is a high concentration of full interest only (IO) structures (26.20% of the pool) and partial IO structures (45.30% of the pool). These factors are mitigated by the lower loss severities observed historically for large loans (the average original loan balance for the pool is considered high, at $21.60 million) and in DBRS’s treatment of loans with IO payment structures wherein the more punitive of the DBRS term and DBRS refinance DSCR (which would be more punitive for loans with IO structures in place) is used to determine the probability of default (POD). Additionally, the pool will amortize by 12.0% during the life of the transaction when including the amortization post-ARD for the State Farm Portfolio loan, a level that is in line with other securitizations of this vintage. DBRS also notes challenges in that there are eight loans in the pool, representing 20.9% of the pool balance, that have been determined to have sponsors with limited real estate experience, bankruptcies, foreclosures and/or limited net worth and/or liquidity. These loans are modeled with an increased POD.

As of the February 2016 remittance report, there were nine loans on the servicer’s watchlist, representing 14.34% of the pool balance, and one loan in special servicing, representing 1.32% of the pool balance. Two of the loans on the watchlist are in the Top 15 for the pool in Prospectus ID #5, Sixty LES (5.94% of the pool) and Prospectus ID #11, Newport Commons (2.73% of the pool). Both loans are being monitored for cash flow declines from issuance, with the Newport Commons loan also being monitored for a September 2015 fire that resulted in the loss of 20 units at the property. The remaining seven loans on the watchlist are exhibiting stable credit metrics from issuance, but are being monitored for relatively minor deferred maintenance items or near-term tenant rollover. The loan in special servicing, Prospectus ID #19, Cincinnati Multifamily Portfolio (1.32% of the pool), transferred to the special servicer in October 2015 after the city of Cincinnati filed suit against the borrower. The largest loan on the watchlist and the loan in special servicing are detailed below.

The Cincinnati Multifamily Portfolio loan is secured by a portfolio of four Class C (one of which was deemed Class B/C by the appraiser) multifamily properties located in Cincinnati, Ohio. The properties were constructed between 1925 and 1979 and range in size from 114 units to 537 units. The loan transferred to special servicing in October 2015 for imminent default, as the City of Cincinnati (the City) had filed suit against the borrower in connection with outstanding housing code violations at three of the four properties. The City requested a receiver be installed at each property as part of its complaint. The special servicer reports that the borrower has not been cooperative since the loan’s transfer and, as a result, information on the extent of the code violations is not known at this time. In addition, the lack of cooperation has delayed the special servicer’s efforts in obtaining an updated appraisal for the portfolio, which was valued at $20.01 million ($37,263 per unit) at issuance.

The borrower has not provided updated financial reporting for the properties since issuance. The servicer did conduct site inspections for all four properties in April and June 2015, with the reports showing all four were rated a “3” on the MBA scale, which indicates a normal condition for the property’s age and market, with some deferred maintenance and/or life safety items observed. The occupancy rates as of the respective inspection dates ranged between 87.0% and 93.0%, comparing with the portfolio average of 92.0% at issuance. Although maintenance issues were observed at all four locations, the properties appear to be in largely the same condition as at issuance, with signs of mismanagement in overgrown landscaping, debris throughout the sites and delays in completing necessary routine repairs. The special servicer reports that foreclosure proceedings were initiated in December 2015, with a receiver appointed in February 2016. Now that a receiver is in place, the special servicer should be able to access the properties and obtain updated operating metrics for the properties. An appraisal should be obtained in the near term as well. Given the lack of updated credit metrics and no update to the portfolio’s value since issuance, the projected loss severity for this loan at disposition is difficult to discern. The loan was modeled with a significant haircut to the DBRS UW NCF figure, with the POD floored at 100% across all rating categories.

The largest loan on the watchlist, Sixty LES, is secured by a 141-key boutique hotel located in New York’s Lower East Side. The property was developed in 2008 and renovated in 2012 by the sponsor, who indicated plans at issuance of investing an additional $600,000 in upgrades to the property that would include lobby and pool area renovations. The loan is structured with an initial IO period of three years. The loan is being monitored for cash flow declines from issuance that resulted in an in-place DSCR at YE2014 of 1.32 times (x) (amortizing DSCR of 1.07x) and in-place DSCR of 0.93x at Q3 2015 (amortizing DSCR of 0.75x). The cash flow declines are a combination of a decline in RevPAR and an increase in room expenses since issuance. The June 2015 Smith Travel Research (STR) report showed ADR, RevPAR and occupancy for the property of $319.18, $260.64 and 81.7%, respectively, for the trailing twelve month (TTM) period. At issuance, the June 2014 STR report showed the property’s ADR at $340.42, RevPAR at $278.35 and occupancy at 81.8% for the TTM period, indicating that RevPAR declined approximately 6.7% between the two reporting periods. At issuance, DBRS noted that increased competition was scheduled to come online in the near term that would likely depress RevPAR at the subject for a period of time, risk that was addressed with a cap on the occupancy rate of the property’s ADR to 2013 levels in the DBRS underwriting. However, as occupancy rates and the property’s ADR were lower than expected for some months in 2015, the annualized Q3 departmental revenue figure still represents a decline of approximately 3.30% from the DBRS UW figure and a decline of 4.2% from the issuer’s UW figure.

In addition to the periodic declines in occupancy for the property in 2015, NCF has also been driven down by a significant increase in room expenses, which were up by 52.10% over the DBRS UW figures at Q3 2015. The borrower reports that the increase is attributable to a combination of factors, which include the hiring of a new “director of nightlife” to replace the previous director of food & beverage (with the former at a higher salary than the latter) and the replacement of the hotel’s general manager (GM) with a hotel manager, who also garners a higher salary that is now coded as a room expense, where the GM’s salary was previously coded under general payroll expenses. In addition, the previous laundry service has been replaced with a more expensive option, also contributing to the uptick in room expenses. The borrower advises that these changes have been made as part of the larger plans to renovate the hotel and repurpose the enclosed patio area that surrounds the pool, which is a unique amenity for hotels in this market, which typically have no pools and/or only limited outdoor space. Once the renovations, which are scheduled to be completed over phases in 2016, are complete, the borrower expects the hotel’s competitive position to improve and ADR, RevPAR and occupancy levels to stabilize over the remainder of the year into 2017.

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 CMBS Rating Methodology (January 2012) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.