DBRS Confirms Ratings of COMM 2014-UBS4 Mortgage Trust

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-UBS4 (the Certificates), issued by COMM 2014-UBS4 Mortgage 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-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 C at A (sf)
-- Class PEZ at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

All trends are Stable. 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 stable performance of the transaction, which has experienced a collateral reduction of 1.3% as a result of scheduled loan amortization since closing. At issuance, the collateral consisted of 91 fixed-rate loans secured by 124 commercial and multifamily properties. As of the May 2016 remittance, all 91 loans remain in the pool with an aggregate outstanding principal balance of $1,271.3 million. The pool is concentrated by market type and loan size, as properties located in urban markets and the top ten loans represent 22.6% and 47.3% of the pool balance, respectively. The top 15 loans continue to exhibit stable performance with a weighted-average (WA) debt service coverage ratio (DSCR) of 1.75 times (x) and WA net cash flow growth over the respective DBRS underwritten figures of 16.0%, based on the most recent reporting available for the individual loans. As of the May 2016 remittance, there are two loans in special servicing and five loans on the servicer’s watchlist, representing 0.5% and 10.4% of the current pool balance, respectively. The largest loan on the servicer’s watchlist and the two loans in special servicing are discussed in detail below.

The 597 Fifth Avenue loan (Pros ID#2, 8.3% of the pool balance) is secured by two Class B mixed-use retail and office properties in Midtown Manhattan. The loan was added to the servicer’s watchlist due to the subject’s elevated combined vacancy rate of 36.4%, which is above market but below the combined vacancy rate of 48.5% at issuance, which consisted entirely of office space at the property, with the retail spaces 100% occupied. The retail portion of the property continues to show 100% occupancy. The property is located along a highly sought-after Fifth Avenue retail corridor, and at issuance the appraiser estimated the rental rates for the two largest retail tenants, which combine for 19.6% of the NRA, to be at approximately half of what the market would command. DBRS underwrote a vacancy factor of 19.7% at issuance and noted considerable upside in the ground-floor retail rents and potential for vacant office space to be leased to market levels.

According to the servicer, the borrower has gained leasing momentum through its pre-built program, and, as a result of those and other marketing efforts, the occupancy rate according to the January 2016 rent roll has improved to 63.6% from 53.6% in April 2015, with Sephora (15.3% of the net rentable area (NRA)) as the largest tenant. Sephora recently extended its lease by nine months to February 2017, with a corresponding increase in the rental rate from $613 psf to $687 psf. At issuance, DBRS noted the borrower was interested in the possibility of combining the Sephora space with an adjacent space to improve functionality and draw a larger retail tenant. The loan is structured to require the borrower to post 125% of the projected cost of such a project into a reserve with the servicer should those plans come to fruition.

New office leasing activity at the property since issuance includes the third-largest tenant, Bateleur Capital, LLC (Bateleur), which took possession of its space in August 2015 on a lease through 2023 and occupies 7.5% of the combined NRA. Bateleur’s rental rate of $59 psf appears to be in line with market and compares well with existing leases for similarly located tenants. Despite the low occupancy rate, the loan remains current, with a July 2015 amortizing debt service coverage ratio (DSCR) of 1.49 times (x), an improvement as compared with the YE2014 amortizing DSCR of 1.13x. The loan also benefits from an outstanding debt service reserve balance totalling $1.2 million as of May 2016.

The Stanley Apartments loan (Pros ID#75, 0.3% of the pool balance) is secured by a 39-unit apartment complex in Stanley, North Dakota. The loan transferred to special servicing in February 2016 for imminent default resulting from cash flow difficulties at the property. As of May 2016, the servicer noted that the current workout strategy is being dual tracked for a modification or foreclosure. According to the March 2016 rent roll, the property occupancy rate has declined to 64.0% from 100% at issuance, with eight of the occupied units currently on notice. The elevated vacancy is attributed to the decline in market performance of the energy sector, as the subject is located in an area which is highly dependent on the oil economy. Three comparable properties in the submarket are also reporting stressed occupancy levels ranging from 30% to 60%, according to the March 2016 site inspection. In response to the soft market, the borrower is offering one month free rent, with a 13-month lease and reduced security deposits. According to the March 2016 site inspection, asking rents for the subject range from $1,000 for one bedrooms to $1,400 for three bedrooms, which remain relatively in line with the submarket, but considerably below the average rental rate of $2,326 per unit for the subject at issuance. A recent broker opinion of value obtained by the servicer estimates that the property’s as-is value has fallen significantly since the issuance value of $6.5 million. Given the projected value decline since issuance and current outstanding advances of $105,251, DBRS anticipates the loss severity at disposition could exceed 70.0%.

The Microtel Inn & Suites loan (Pros ID#80, 0.3% of the pool balance) is secured by an 81-key limited-service hotel in Baton Rouge, Louisiana. The loan transferred to special servicing in January 2016 as the borrower failed to make the November 2015 and subsequent payments. As of May 2016, the servicer continues to work with the borrower and has filed for the appointment of a Keeper to take control of the asset. An updated appraisal has not been obtained to date. According to the February 2016 Smith Travel Research (STR) report, the property reported an occupancy rate, ADR and RevPAR of 74.4%, $61.10 and $45.46, compared with the competitive set, which reported 59.3%, $65.16 and $38.61, respectively. The YE2015 DSCR was reported to be 1.36x, down from YE2014 DSCR of 1.44x, but in line with DBRS UW DSCR. Given the healthy financial performance of the property, the payment default appears to be a borrower issue and given that increased risk, DBRS modeled the loan with an elevated probability of default.

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.