DBRS Confirms Ratings on COMM 2014-LC17 Commercial Mortgage Trust

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC17 (the Certificates), issued by COMM 2014-LC17 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-5 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 X-E at AAA (sf)
-- Class X-F at AAA (sf)
-- Class X-G at AAA (sf)
-- Class A-M at AAA (sf)
-- Class B at AA (sf)
-- Class PEZ at A (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (high) (sf)
-- Class G at B (low) (sf)

All trends are Stable, with the exception of Class G, which has been assigned a Negative trend given the uncertainty surrounding loans currently in special servicing, which are discussed further below. 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 current performance of the transaction, which has experienced a collateral reduction of 2.3% as a result of scheduled loan amortization since issuance. The collateral consists of 71 fixed-rate loans secured by 207 commercial and multifamily 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 May 2016 remittance, all 71 loans remain in the pool, with an aggregate outstanding principle balance of approximately $1.21 billion. To date, six loans (6.0% of the pool) reported partial-year 2015 cash flows (most being Q3 2015), 28 loans (40.3% of the pool) reported YE2015 cash flows, while 36 loans reported partial-year 2016 cash flows (most being Q1 2016). The Cincinnati Portfolio Pool B loan (0.4% of the pool), which transferred to special servicing in December 2015 due to imminent default, has not reported updated financials since closing. At this time, a receiver is in place and the servicer is proceeding with foreclosure.

Based on the most recent available cash flows for the Top 15 loans (57.1% of the pool), the WA amortizing DSCR was 1.80x, compared with the DBRS UW figure of 1.66x, reflective of a WA NCF growth of 7.7% compared with the DBRS UW figures. There are five loans in the Top 15, representing 18.5% of the pool, exhibiting NCF declines compared with the DBRS UW figures, with declines ranging from 0.7% to 28.7%. These five loans include 80 and 90 Maiden Lane (Prospectus ID#3, 7.4% of the pool), Myrtle Beach Marriott Resort & Spa (Prospectus ID#4, 4.4% of the pool), SRC Multifamily Portfolio 2 (Prospectus ID#10, 2.4% of the pool), SRC Multifamily Portfolio 3 (Prospectus ID#11, 2.3% of the pool) and the Bartlett Flex Portfolio (Prospectus ID#12, 1.9% of the pool). Based on the YE2015 and annualized 2016 cash flows for these loans, the WA amortizing DSCR was 1.31x, compared to the DBRS UW figure of 1.45x, reflective of a WA NCF decline of 17.2% compared to DBRS UW figures.

As of the May 2016 remittance, there are three loans in special servicing and eight loans on the servicer’s watchlist, representing 2.7% and 11.4% of the pool, respectively. Four of the loans (9.9% of the pool) currently on the servicer’s watchlist were flagged due to performance-related reasons, while two loans (0.5% of the pool) were flagged because of upcoming tenant rollover. Based on the YE2015 and annualized 2016 cash flows for these six loans, the WA amortizing DSCR was 1.32x, compared to the DBRS UW figure of 1.49x, reflective of a WA NCF decline of 16.2% compared with DBRS UW figures. In addition, two loans (1.0% of the pool) were flagged due to non-performance-related items of deferred maintenance. The two largest loans in special servicing and the largest loan on the servicer’s watchlist are discussed in detail below.

The Eagle Ford loan (Prospectus ID#17, 1.5% of the pool) is secured by three cross-collateralized limited-service hotel properties, all of which are located south/southwest of San Antonio, situated near the Eagle Ford Shale. The hotels comprise 202 keys and were all built between 2012 and 2013. As of Q3 2015 (most recent financials), the loan reported an annualized DSCR of 0.80x, compared to the DBRS UW figure of 1.61x. The loan transferred to special servicing in February 2016 due to monetary default. To date, two loan modification requests from the borrower have been rejected and the servicer is proceeding with foreclosure. As of Q1 2016, the portfolio reported a T-12 occupancy of 54.3%, an average daily rate (ADR) of $100.60 and a revenue per available room (RevPAR) figure of $54.99, compared with the prior year’s T-12 figures of 68.4%, $126.25 and $78.97, respectively. The updated figures are representative of percentage declines of 26.0%, 25.5% and 43.6%, respectively, from the prior year’s T-12 figures. During the same period (Q1 2016), the portfolio’s competitive set reported an occupancy rate of 48.4%, ADR of $92.82 and RevPAR of $46.20, respectively. Although the portfolio is operating above its local competitors, it is evident that the hotels’ dependence on the energy industry has drastically hampered performance. A recent broker opinion of value (BOV) of $10.5 million obtained by the servicer estimates that the property’s as-is value has fallen significantly since the issuance value of $27.2 million. Given the projected value decline since issuance and current outstanding advances of $1.05 million, DBRS anticipates the loss severity at disposition could exceed 65.0%.

The Georgia Multifamily Portfolio loan (Prospectus ID#35, 0.9% of the pool) is secured by five one-story Class C garden-style properties, totaling 386 units, located in smaller cities surrounding Atlanta, Georgia. The five properties were constructed between 1985 and 1986, offering similar layouts and minimal amenity packages, as well as on-site leasing office and laundry rooms. The loan transferred to special servicing in November 2015 due to monetary default. To date, the servicer is dual-tracking the foreclosure process, while holding conversations with the borrower on alternative resolutions. According to the servicer, the borrower has advised that they are planning on improving loan performance, ultimately in an attempt to bring the loan current.

As of YE2015 financials, the loan had a DSCR of 0.71x, compared to the DBRS UW figure of 1.09x. The decline in performance comes as a result of a significant decline in occupancy portfolio-wide. As of April 2016, the portfolio had an average occupancy rate of 72.2%, well below the portfolio’s competitive set occupancy rate of 94.4% during the same time period and the portfolio’s occupancy rate of 92.5% at issuance. Although the portfolio’s average rental rate during the same time period grew from $510 per unit to $544 per unit, the decline in occupancy resulted in nearly a 25.0% decline in the EGI. Occupancy across the portfolio was impacted primarily by two of the properties: Shannon Woods and Oakley Shoals, which had the most significant occupancy declines. The properties are situated within a one-mile proximity of one another, located in Union City, Georgia, approximately 18.0 miles southwest of Atlanta. As of April 2016, these two properties had an average occupancy rate of 45.3%, well below the local competitive set’s occupancy rate of 94.6% during the same time period and the average occupancy rate of 88.8% achieved by the properties at issuance. According to the April 2016 appraisals, both properties were observed to be of average quality, but in below-average condition after reportedly being under-managed. According to the appraiser, a number of deferred maintenance items and capital improvements were noted, with an estimated cost of approximately $700,000. The two properties consist of approximately 73.8% one-bedroom units, with an average unit size of 570 sf per unit, compared to the South Fulton submarket’s average one-bedroom size of 762 sf. The two properties account for 53.1% of the allocated loan balance. All five properties are managed by the Strategic Management Partners, a third-party management company, which appears to have local expertise in the market, managing a number of properties in the Atlanta MSA. The company specializes in increasing profitability primarily for Class B/C apartment communities.

Utilizing a sales comparison approach, the appraiser found the portfolio to have an as-is value of $9.42 million ($24,404 per unit) as of April 2016, indicative of a LTV of 113.6%. This compares negatively with the $13.39 million ($34,689 per unit) at issuance, indicative of 77.5% LTV. DBRS has modeled this loan with an elevated probability of default given the recent decline in performance, as well as the sharp drop in value since issuance.

The 80 and 90 Maiden Lane loan is secured by two adjacent mixed-use office properties located in the financial district of New York City, which together total 552,064 sf. Originally constructed in 1921, 80 Maiden Lane is a 25-story office building (524,292 sf), whereas 90 Maiden Lane is a four-story office building constructed in 1810 (27,772 sf), with the most recent renovations occurring in 2004. The five-year interest-only loan represents the $90 million pari passu, A-1 controlling share of a $145 million whole loan; the A-2 non-controlling note is securitized in the COMM 2014-CCRE20 transaction, also rated by DBRS. The loan is sponsored by Paul Wasserman (40.5% interest), a joint venture between Normandy Real Estate Fund III, LP and Kushner Companies (40.5% interest) and Robert Wolf (19.0% interest). Collectively, the sponsor is an experienced owner and operator with institutional knowledge, which contributed $30.5 million of fresh equity behind the $145 million whole loan at issuance.

The loan was placed on the servicer’s watchlist in October 2015 as a result of a low Q2 2015 annualized DSCR of 1.03x, compared to the DBRS UW figure of 1.54x. At the time, the decline in performance was a result of increased vacancy (up 3.5%), decreased expense reimbursements (down 50.8%) and increased operating expenses (up 16.5%), primarily driven by increased Utilities (up 32.0%), R&M (up 21.0%) and Payroll & Benefits (up 86.0%) costs. As of Q1 2016, operating expenses remained 15.9% above the DBRS UW figures; however, the loan’s performance improved, reporting an annualized DSCR of 1.34x, as a result of increased expense reimbursements, compared with the previous figures. Expense reimbursements still remain 18.2% below the DBRS UW figure. The servicer has contacted the borrower regarding the reported decline in reimbursements and is still waiting for a response. The servicer noted that a number of non-reoccurring expenses have recently been incurred, including permits and licenses, electrical work, unanticipated inspections and life safety implementation.

According to the March 2016 rent roll, the property was 91.1% occupied, up from 90.6% in June 2015, but down from 94.1% at issuance. The office is currently occupied by 70 tenants, of which the largest three include the New York Department of Investigation (19.5% of the net rentable area (NRA)), the Office of Children & Family (8.3% of the NRA) and United Cerebral Palsy (5.5% of the NRA), with lease expirations in July 2025, December 2020 and August 2023, respectively. Within the next 12 months, 14 tenants, representing approximately 15.2% of the NRA, have upcoming lease expirations. The largest three tenants with near-term upcoming rollover include the State of New York – Department of Health (3.0% of the NRA), the Lower East Side Service Center (2.8% of the NRA) and the Association of Junior Leagues (2.1% of the NRA), with lease expirations in July 2016, December 2016 and August 2017, respectively. As of Q1 2016, CoStar reported that Class B office buildings in the Financial District submarket had an average triple net (NNN) rental rate of $47.55 psf NNN, with a vacancy rate of 8.9%. The subject’s current average rental rate of $42.97 psf NNN indicates that there may be potential rental revenue upside as leases roll.

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 (December 2015), which can be found on our website under Methodologies.