DBRS Confirms Ratings of WFRBS Commercial Mortgage Trust 2013-C18

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2013-C18 (the Certificates) issued by WFRBS Commercial Mortgage Trust 2013-C18 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 B at AA (low) (sf)
-- Class PEX at A (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class X-A at AAA (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class G. The Class PEX certificates are exchangeable with the Class A-S, Class B and Class C certificates (and vice versa).

The rating confirmations reflect that the current performance of the transaction remains stable. The collateral consists of 67 fixed-rate loans secured by 73 commercial properties. As of the November 2016 remittance report, all 67 loans remain in the pool with an aggregate outstanding principal balance of approximately $1,013 million, representing a collateral reduction of 2.4% since issuance because of scheduled loan amortization. To date, 46 loans (76.1% of the pool) reported partial-year 2016 cash flows (most being Q2 2016), while 22 loans (20.1% of the pool) reported YE2015 financials. The remaining loan (3.8% of the pool) has fully defeased. According to YE2015 financials, the pool had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 2.30 times (x) and 12.3%, respectively, compared with the DBRS underwritten (UW) figures of 2.05x and 11.3%, respectively. The pool is concentrated by loans size, as the Top 5 and Top 15 loans represent 52.8% and 74.9% of the current pool balance, respectively. The pool also has a large concentration of loans secured by hotel properties, as four loans (17.1% of the pool) within the Top 10 are secured by this property type. As a result, a concentration penalty was applied to mitigate the pool’s lack of diversity, increasing the pool-wide probability of default.

Based on the most recent cash flow reporting (most being Q2 2016), the Top 15 loans (excluding defeased collateral) reported a WA DSCR of 2.54x compared with the DBRS UW figure of 2.28x, reflective of a WA amortizing net cash flow (NCF) growth of 9.8%. There are six loans (17.6% of the pool) in Top 15 exhibiting NCF declines compared with the DBRS UW figures, with declines ranging from 0.3% to 22.5%. These six loans include JFK Hilton (Prospectus ID#4, 6.6% of the pool), Starwood/Schulte Hotel Portfolio (3.7% of the pool), Cedar Rapids Office Portfolio (2.3% of the pool), HIE at Magnificent Mile (Prospectus ID#10, 2.3% of the pool), San Marcos Apartments (Prospectus ID#14, 1.4% of the pool) and Hawthorne Valley Shopping Center (1.3% of the pool). Based on the annualized 2016 cash flows for these loans, the WA amortizing DSCR was 1.28x compared with the DBRS UW figure of 1.47x, which reflects a WA NCF decline of 12.5%. Excluding the San Marcos Apartments loan (highlighted further below), the five loans exhibiting NCF declines within the Top 15 were as a result of increased expenses that range from approximately 11.6% to 23.6% over the DBRS UW figures.

The largest of these five loans, the JFK Hilton loan, is secured by the fee interest in a 12-storey, 356-key full-service Hilton hotel located adjacent to the John F. Kennedy Airport in Jamaica, New York. The property was originally constructed in 1987 as a Holiday Inn and was subsequently run as an independent hotel for a period of time before being rebranded to a Hilton in 2012 at a total renovation cost of $21.0 million ($59,000 per key). According to Q2 2016 financials, the loan had a trailing 12-months (T-12) DSCR of 1.22x, a decline from 1.25x at YE2015 and the DBRS UW figure of 1.53x. The performance decline is a result of ongoing increases in operating expenses, which have increased 13.2% since issuance, predominantly because of increases in Franchise Fees (18.5%), Advertising and Marketing (51.4%), General and Administrative (18.0%) and Real Estate Tax (17.4%) costs since issuance. At the time of the October 2014 site inspection, the subject was in the process of improving its curb appeal by providing more parking and landscaping to the front entrance at a cost of approximately $1.0 million. According to the September 2015 site inspection, the property was found to be in Excellent condition with all capex completed, including the addition of 133 parking spaces. Based on the June 2016 STR report, the property had a T-12 occupancy rate of 90.8%, an Average Daily Rate of $171.20 and Revenue per Available Room of $155.50 compared with the competitive set’s figures of 89.4%, $153.80 and $137.60, respectively. The newest additions to the subject’s competitive set include a 201-key Holiday Inn and a 330-key Crown Plaza, which opened for business in November 2013 and January 2014, respectively. The subject has historically outperformed its competition, and DBRS considers the subject property and brand affiliation to be superior to the newer competition.

As of the November 2016 remittance report, there were no loans in special servicing and two loans (0.9% of the pool) on the servicer’s watchlist. DBRS has highlighted the San Marcos Apartments loan below, which was removed from the watchlist with the November 2016 remittance; however, DBRS is highlighting the loan as a result of its performance decline.

The larger of the two loans, San Marcos Apartments, is secured by a 468-unit, garden-style apartment complex located in El Paso, Texas. The property was originally constructed in 1979 and offers common amenities, including two swimming pools, a spa, sand volleyball court, two clubhouses, a barbecue grilling area and a playground. The loan was placed on the servicer’s watchlist in August 2016 because of a low Q2 2016 annualized DSCR of 1.04x, which was caused by a decline in rental revenue. As of June 2016, the property was 80.1% occupied with an average rental rate of $556 per unit compared with 89.1% occupied with an average rental rate of $550 per unit in June 2015. Historically, the subject property has had minor fluctuations in occupancy; however, it has generally operated above 85.0% occupancy. Because of the subject’s dated nature (as noted in the November 2015 servicer site inspection), rental rates have remained relatively static since issuance when the property reported an average rental rate of $551 per unit prior to securitization in June 2013. Per REIS, as of Q3 2016, properties located within the El Paso market built between 1970 and 1980 reported an average rental rate of $679 per unit with an average vacancy rate of 5.6% compared with the total El Paso market, which reported these figures at $776 per unit and 5.6%, respectively. Although the subject is aged and operating below its general market, the inspector noted the property to be well maintained, with approximately $120,000 invested in capital expenditures through 2015, which included carpet/tile replacement, door/counter replacement, HVAC updates and window replacements. At issuance, the sponsor owned approximately 7,000 units within the El Paso market and reported a net worth of approximately $26.7 million. DBRS has modeled the loan with a stressed cash flow given the recent decline in performance.

At issuance, DBRS assigned an investment-grade shadow rating to two loans: Garden State Plaza (Prospectus ID#1, 14.8% of the pool) and The Outlet Collection – Jersey Gardens (Prospectus ID#3, 13.8% of the pool). DBRS has today confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

The rating assigned to Classes B, C, E, F and PEX 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 assigned rating reflects the sustainability of loan performance trends not demonstrated.

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

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