DBRS Confirms Ratings on LSTAR Commercial Mortgage Trust 2014-2

DBRS, Inc. (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-2 (the Certificates) issued by LSTAR Commercial Mortgage Trust 2014-2:

-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (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 rating confirmations reflect the continued stable performance of the transaction. Since issuance, the transaction has experienced collateral reduction of 31.6% as a result of unexpected loan prepayments and loan liquidations as 80 of the original 208 loans have paid out of the trust ahead of their respective maturity dates. According to the most recent reporting, the remaining loans in the pool have a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.40 times (x) and 10.1%, respectively. The transaction is concentrated as the largest four loans represent 58.0% of the current pool balance. According to the most recent trailing 12-month reporting (September 2015 and YE2015), these loans have a WA DSCR and WA debt yield of 1.58x and 10.2%, respectively.

The four largest loans in the pool were newly originated at issuance while the remaining 124 loans are seasoned loans that were purchased by the loan seller from Fannie Mae or were originally part of the now retired LASL 2006-MF2 and LASL 2006-MF3 CMBS transactions. The four large loans are secured by five properties, including an office property, a student housing property and three hotels, while the seasoned loans are secured by multifamily and manufactured housing community properties. The seasoned loans are granular within the transaction as the largest seasoned loan represents 1.4% of the current pool balance. Of the remaining seasoned loans, 116 loans, representing 40.0% of the current pool balance, are fully amortizing.

As of the April 2016 remittance, there are four loans in special servicing and five loans on the servicer’s watchlist, representing 1.3% and 3.3% of the current pool balance, respectively. The loans on the servicer’s watchlist have been flagged because of items of deferred maintenance or a decrease in financial performance since issuance. The loans in special servicing were each transferred as a result of payment default with each individual borrower expected to file for bankruptcy protection. The largest loan in special servicing and the third-largest loan in the transaction are highlighted below.

The 1673 Cedar Avenue loan (0.72% of the current pool balance) is secured by a 68-unit multifamily property in Cincinnati, Ohio, originally built in 1964. The loan was transferred to special servicing in July 2015 because of imminent default and is expected to become real estate owned in May 2016. Upon installing a receiver at the property, the special servicer determined that significant capital repairs including a new boiler, a new chiller and new risers were needed at the property. In total, the repairs were estimated to cost in excess of $600,000 with an expected completion date of July 2016. To date, advances on the loan total approximately $625,000 as a portion of the work has already been completed.

According to the October 2015 rent roll, the property was 73.5% occupied with average rents of $560 per unit, which is a decline from the issuance occupancy rate of 93.0%. The majority of tenants at the property receive financial assistance via Section 8 and the Housing Assistance Payment programs. The October 2015 annualized net cash flow was approximately $20,000, significantly below the $155,000 figure at issuance. A November 2015 appraisal valued the property at $1.4 million, down from the issuance value of $1.9 million. DBRS expects the trust to experience a significant loss when the loan is resolved.

The Waramaug Hotel Portfolio loan (10.4% of the current pool balance) is secured by the 257-key Hilton Phoenix Airport (Hilton) and the 215-key Crowne Plaza Columbus (Crowne). The Hilton asset represents 72.4% of the allocated portfolio loan balance and the Crowne asset represents the remaining 27.6%. Originally built in 1989, the Hilton asset is located 1.5 miles southwest of the Phoenix Sky Harbor International Airport. Throughout 2014, the subject underwent a $7.1 million Property Improvement Plan (PIP) renovation, which included new hard and soft goods to all guest rooms, a new lobby and common areas and exterior improvements. Amenities include two restaurants, a bar, an outdoor pool, a fitness center, 9,500 square feet of meeting space and a 56-seat amphitheater. According to YE2015 reporting, the hotel had a DSCR of 2.44x and an occupancy rate, average daily rate (ADR) and revenue per available room (RevPAR) of 84.9%, $132.00 and $112.00, respectively. These figures improved over the YE2014 figures when the DSCR was 1.44x and occupancy, ADR and RevPAR were 73.0%, $119.00 and $87.00, respectively. The subject continues to outperform its competitive set.

The Crowne asset was originally built in 1980 and is located within the Metro Place Office Park, approximately 15 miles northwest of the Columbus, Ohio, central business district. The subject also underwent a PIP throughout 2014, totaling $6.0 million. Renovations also included new hard and soft goods to all guest rooms, a new lobby as well as common areas and exterior improvements. Amenities include a restaurant and bar, an indoor pool, a fitness center and 11,700 square feet of meeting space. According to YE2015 reporting, the hotel reported a DSCR of 1.17x and had an occupancy rate, ADR and RevPAR of 58.1%, $93.00 and $54.00, respectively. These figures improved over the YE2014 figures when the DSCR was -0.18x and occupancy, ADR and RevPAR were 42.0%, $99.00 and $42.00, respectively. Performance has improved as hotel management has generated new business with corporate clients, a business segment it lost prior to the renovations. The combined YE2015 DSCR for the portfolio was 2.09x, a significant improvement over the YE2014 figure of 0.99x.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) 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.

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