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

DBRS Limited (DBRS) has today confirmed the ratings on 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 overall stability of the transaction and specifically address an update to the Pacific Design Center loan (Prospectus ID#4, 5.2% of the current pool), which DBRS anticipates will have a net cash flow decline in the near future. The loan is discussed in detail below.

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 subject loan represents $50 million A-2 note non-controlling pari passu piece of the $145 million whole loan; the A-1 controlling note is secured in the COMM 2014-CCRE18 transaction, also rated by DBRS. The loan is sponsored by Charles S. Cohen, the current owner, president and Chief Executive Officer 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, the Interpublic Group of Companies, Inc. (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 rate of 4.9% and 6.2%, respectively. The loan benefits from a tenant reserve which, as of April 2016, remittance 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 193,720 sf portion at the property, expiring in July 2026. The purpose of this master lease was to bring occupancy of this space (193,720 sf) to 85.0% at a rental rate of $35.00 psf with a total annual rent of $6.8 million in the event that tenants vacated the property. Mr. 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 1.10 times (x). 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, there are no loans in special servicing and ten loans, representing 7.3% of the pool, on the servicer’s watchlist. Five of these loans, representing 2.5% of the pool, were flagged because of items of deferred maintenance. One loan, representing 0.5% of the pool, was flagged as a result of upcoming rollover within the next six months; however, most tenants have indicated that they will execute a lease renewal. The five remaining loans on the watchlist, representing 4.7% of the pool, were flagged for performance-related reasons. According to YE2015 financials, these five loans had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.38x and 10.6%, respectively, compared with the DBRS underwritten figures of 1.44x and 11.3%, respectively. Please refer to the February 10, 2016, press release on the transaction for more information.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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 (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.