DBRS Confirms Ratings on COMM 2014-CCRE18 Mortgage Trust, Stable Trends

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-CCRE18 (the Certificates) issued by COMM 2014-CCRE18 Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-C at AAA (sf)
-- Class A-M at AAA (sf)
-- Class B at AA (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (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 is stable from issuance, with cash flows remaining generally in line with the DBRS underwritten (UW) levels. The collateral consists of 49 fixed-rate loans secured by 60 commercial properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.45 times (x) and 8.9%, respectively. As of the April 2016 remittance, 16 loans (28.6% of the pool) reported partial-year 2015 cash flows (most being Q3 2015), while the remaining 33 loans (71.4% of the pool) reported year-end 2015 cash flows. The pool is concentrated by loan size, as the Top 10 loans represent 57.8% of the pool, while the Top 15 loans represent 69.9% of the pool. Based on the 2015 cash flows (both annualized and year-end 2015 cash flows) for the Top 15 loans, the WA amortizing DSCR was 1.59x, with WA net cash flow (NCF) growth over the respective DBRS UW figures of approximately 8.6%. The largest loan, the Bronx Terminal Market loan (Prospectus ID#1, 13.6% of the pool), reported a YE2015 DSCR of 1.70x, an improvement from the DBRS UW figure of 1.58x, reflecting a positive NCF growth over the DBRS UW figure of 7.3%. As of the April 2016 remittance reports, all 49 loans remain in the pool, with an aggregate balance of $984 million, representing collateral reduction of approximately 1.2% since issuance as a result of scheduled loan amortization.

There are four loans in the Top 15, representing 20.3% of the pool, exhibiting NCF declines compared with the DBRS UW figures (based on annualized and year-end 2015 cash flows), with declines ranging from 0.7% to 29.5%. These four loans include Pacific Design Center (Prospectus ID#2, 9.7% of the pool), Southfield Town Center (Prospectus ID#4, 6.3% of the pool), Deerfield Park Plaza (2.3% of the pool) and University Town Center (Prospectus ID#14, 2.1% of the pool). Based on the 2015 cash flows for these loans, the WA amortizing DSCR was 1.42x, compared to the DBRS UW figure of 1.58x, reflective of a WA NCF decline of 5.8% compared to DBRS UW figures. The Pacific Design Center loan is highlighted below, as it has recently had a decline in performance, and DBRS anticipates that the loan will experience a greater decline in performance in the near future.

The Pacific Design Center loan is secured by the fee interest in two buildings (the Blue Building and the Green Building) comprising approximately 1.0 million square feet (sf) that are part of the larger Pacific Design Center located in West Hollywood, California. The Blue Building was constructed in 1976 and consists of 611,700 sf of showroom space, while the Green Building was built in 1988 and consists of 385,100 sf of design showroom and office space. Also located on the property is the Red Building (non-collateral), which is a 420,000 sf two-tower office building completed in 2012 through 2013. The loan represents the $95 million pari passu, A-1 controlling share of a $145 million whole loan; the A-2 note is securitized in the WFCM 2014-LC16 transaction, also rated by DBRS. The loan is sponsored by Charles S. Cohen, the current owner, president and CEO of Cohen Brothers Realty Corporation. At issuance, there was $84.5 million of hard equity behind the $145 million whole loan.

According to the December 2015 rent roll, the property was approximately 68.0% occupied with an average rental rate of $33.74 per square foot (psf), compared with the 72.7% occupancy rate with an average rental rate of $30.90 psf at issuance. Within the next 12 months, 31 tenants, representing 25.2% of the net rentable area (NRA) have lease expirations. The three largest tenants, Interpublic (5.1% of the NRA), Weber Shandwick/Rogers Cowan (5.1% of the NRA) and BNC (3.9% of the NRA), have all confirmed that they will not renew upon their respective January 2016 lease expirations. According to several news articles, the tenants have all signed leases at Century City, and will be relocating upon lease expiration. At issuance, these tenants were in lease negotiations with the borrower to renew on long-term contracts at higher rates; however, negotiations failed. Factoring in the possible tenants with near-term rollover, occupancy could potentially fall below 50.0%. As of YE2015, CoStar reported that Class A office buildings greater than 100,000 sf within the West Hollywood submarket were achieving rental rates of $47.93 psf, with an average vacancy rate and average availability rate of 4.9% and 7.5%, respectively. CoStar also reported that flex properties within the submarket reported rental rates of $34.71 psf, with an average vacancy rate and average availability of 4.9% and 6.2%, respectively. The loan benefits from a tenant reserve, which as of April 2016 totaled $2.75 million with $50,000 in monthly contributions, in addition to a $500,000 replacement reserve. Furthermore, at issuance, the borrower entered into a master lease with the Cohen Brother Realty Corporation of California for a 193,720 sf portion at the property, expiring as of July 2026. The object of this master lease was to bring occupancy of this space (193,720 sf) to 85.0% at a rental rate of $35 psf, with a total annual rent of $6.8 million. Charles Cohen personally guarantees the lease payments under a springing guarantee that will take effect upon the DSCR (excluding cash flow from the master lease) falling below 1.10x. The amount guaranteed will be permanently released on a proportionate basis upon new tenants taking occupancy and commencing rent on leases with a minimum term of five years. Once the space has been leased up with the leases meeting the applicable terms and rates, the sponsor will be released from the master lease obligations. DBRS gave no credit to the master lease at issuance. DBRS has modeled this loan with an elevated probability of default (POD) given the decline in occupancy and near-term tenant rollover.

As of the April 2016 remittance report, there were five loans on the servicer’s watchlist and two loans in special servicing, representing 7.8% and 1.0% of the pool, respectively. The largest loan on the watchlist, representing 3.0% of the pool, was flagged due to items of deferred maintenance, while the four remaining loans, representing 4.8% of the pool, were flagged due to performance-related reasons. According to 2015 reporting (both annualized and year-end 2015), these four loans had a WA DSCR of 0.78x, compared to the DBRS UW figure of 1.68x, reflective of a WA NCF decline of 60.5% compared to DBRS UW figures. Both loans in special servicing remain current as of April 2016 remittance. The Summit Commons loan (Prospectus ID#38, 0.7% of the pool) was transferred to the special servicer as of March 28, 2016. According to the January 2016 rent roll and the shopping center’s website, the largest tenant, Food Lion (67.5% of the NRA) is operational and current, while occupancy remains stable at 86.0%. To date, the special servicer has not provided a reason to why the loan was transferred; however, DBRS has requested an update. The Hocking Mall loan (Prospectus ID#48, 0.3% of the pool) was transferred to the special servicer in January 2016, following the death of one guarantor. The special servicer is working with the borrower to find a replacement guarantor that meets the requirements. DBRS has highlighted the third-largest loan on the servicer’s watchlist, the GreatStay Hotel Portfolio (Prospectus ID#23, 1.3% of the pool), below.

The GreatStay Hotel Portfolio loan is secured by four full-service hotels located in the Pittsburgh, Pennsylvania, MSA. The properties were constructed between the mid-1960s to the early 1970s and have recently been converted from Holiday Inns to Park Inns by Radisson, with individual new 15-year franchise agreements. At issuance, approximately $4.0 million was set aside in a capital improvement reserve for property improvement plans, with $3.0 million to accrue in a discretionary reserve over the loan term. The loan was placed on the watchlist in September 2015 because of a drastic decline in performance. As of the YE2015 financials, the loan had a DSCR of -0.65x, compared to the DBRS UW figure of 2.62x, reflective of a 125.0% NCF decline. Since issuance, departmental revenue has dropped 32.0%, as a result of a 19.0% decline in rental revenue, whereas operating expenses have increased 13.0%, as a result of a 12% increase in room expenses and a 37% increase in Food & Beverage expenses.

According to the December 2015 STR report, the properties had an average T-12 occupancy rate of 48.0%, an Average Daily Rate (ADR) of $82.0 and a Revenue per Available Room (RevPAR) of $39.0 compared with the December 2013 figures of 64.0%, $94.0 and $60, respectively. Referencing the same reports, the portfolio’s competitors reported an average T-12 occupancy rate of 56.0%, an ADR of $103.0 and a RevPAR of $58.0 as of December 2015, compared with the December 2013 figures of 63.0%, $105.0 and $63.0, respectively. The submarkets that the subject properties are located in have seen a decline in the past two years, with the subject properties operating below their local competitors. According to the borrower, performance is down as a result of new supply and the decline in the oil and gas market. At issuance, the subject properties were the only full-service hotels in each of their respective submarkets; however, five new hotels were either proposed or scheduled to come online. It appears that at least two of these hotels are now operational. The properties all benefit from close proximity and activity in the oil and natural gas industry, generated by the Marcellus Shale. At issuance, each hotel had a number of corporate contracts with companies involved with drilling and extraction, as well supporting industries; however, with the global downturn in energy markets, it appears companies have either reduced or terminated portions of their contracts. DBRS has requested an update on both the new supply of hotels in each given submarket, as well as the current corporate contracts that each asset maintains. The five-year loan is structured with a debt service guarantee until the portfolio has stabilized (achieving a DSCR of 1.35x for four consecutive quarters) under the Park Inn by Radisson flag. DBRS has modeled this loan with an elevated POD to capture the recent performance of the portfolio and the adverse effects of the new supply and dependence on the global energy markets.

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 (March 2016) and CMBS North American Surveillance Methodology (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit ww.dbrs.com or contact us at info@dbrs.com.