DBRS Confirms Ratings on ReadyCap Commercial Mortgage Trust 2014-1

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of ReadyCap Commercial Mortgage Trust 2014-1 Commercial Mortgage Pass-Through Certificates (the Certificates) issued by ReadyCap Commercial Mortgage Trust 2014-1:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class IO-A at AAA (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has experienced a collateral reduction of 28.0% as of the September 2016 remittance. At issuance in October 2014, the collateral consisted of 71 fixed- and floating-rate mortgage loans secured by 75 commercial and multifamily properties. As of the September 2016 remittance, 55 loans remain in the pool with an aggregate outstanding principal balance of $131.0 million. One loan has experienced a relatively small loss of $19,210 (loss severity of 1.2%) with the September 2016 remittance, with trust losses contained to the unrated Class G. The top 15 loans continue to exhibit stable performance with a weighted-average debt service coverage ratio (DSCR) and debt yield of 1.67 times (x) and 12.8%, respectively, based on the most recent year-end reporting available for the individual loans. In addition, the top 15 loans are reporting weighted average positive net cash flow growth of 23.1% over the DBRS underwritten figures. As of the September 2016 remittance, there are no loans in special servicing and five loans on the servicer’s watchlist, representing 6.1% of the current pool balance. The largest loan on the watchlist and another loan in the top 15 are highlighted below.

The Gaslamp SD loan (Prospectus ID#4, 3.8% of the current pool balance) is secured by a 57,000 square foot (sf) retail property located in San Diego, California. The loan was added to the watchlist in July 2016, as a result of the single tenant (Reading Cinemas) vacating ahead of its scheduled November 2017 lease expiration, contributing to a sharp decline in cash flow that resulted in a Q2 2016 DSCR of -0.38x, compared with YE2015 DSCR of 2.71x. The tenant, who was paying a base rental rate of $28.38 per square foot (psf) (annual rent of $1.62 million), was unable to operate profitably with poor sales that had historically averaged approximately $150,000 per screen, well below national theatre sales average of roughly $543,000 per screen as of July 2016. At issuance, DBRS anticipated the tenant would likely vacate the property at lease expiration given the low sales volume. The servicer has advised that the borrower noted the lease was also terminated early to take advantage of the current leasing market and it does not appear that the tenant paid a termination fee. As of October 2016, CoStar market data shows comparable properties in the downtown San Diego Submarket within a 0.1 mile radius of the subject average vacancy rates of 10.0% and average rental rates of $29.92 psf.

Given the unique theatre build-out of the property, re-leasing the vacant space will pose as a challenge despite the highly desirable commercial location. Redevelopment costs would likely be significant and the loan is not structured with reserves to cover those costs or to pay debt service obligations. The property does benefit from its location within the historic Gaslamp Quarter of downtown San Diego and according to Real Capital Analytics, comparable retail properties in the submarket have recently traded at price points between $256 and $317 psf. Those figures compare to the current trust exposure of $87 psf and an issuance value of $16.6 million ($291 psf). As such, although the asset would likely sell at a discount given the build-out of the space, such a sale would likely cover the outstanding loan amount. To capture the increased risk with the lack of cash flow at the property, DBRS has modeled the loan with an increased probability of default and will monitor for developments.

The Scottsdale Promenade loan (Prospectus ID#16, 6.0% of the current pool balance) is secured by a 143,861 sf unanchored retail building in Scottsdale, Arizona. According to the June 2016 rent roll, the property is 69.7% occupied with an average rental rate of $11.83 psf, compared with the occupancy rate of 80.0% at issuance. The property includes a mix of retail, restaurant and office uses with the largest tenant, Tuesday Morning, representing 10.8% of the net rentable area (NRA) and a near term lease expiration in January 2017. In addition, two other tenants individually representing 2.5% of the NRA are scheduled to expire by March 2017. According to October 2016 CoStar market data, comparable properties in the central Scottsdale retail submarket within a 0.25 mile radius of the subject are reporting vacancy rates of 13.1% with the average rental rates in line with the subject at $21.48 psf. In addition, the property is considered to be in above-average condition with no deferred maintenance items, according to the servicer’s September 2015 site inspection. Despite the decline in occupancy from issuance, the Q2 2016 DSCR was relatively healthy at 1.33x, but down from the DBRS UW DSCR of 1.90x. Given the cash flow declines and near term rollover risk, this loan was modeled with an increased probability of default for the purposes of this review. DBRS will continue to monitor for developments.

The ratings assigned to the Classes D, E, and F Certificates materially deviate from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the rating reflects the sustainability of loan performance trends not demonstrated.

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 (October 2016), which can be found on our website under Methodologies.