DBRS Confirms Ratings on ReadyCap Commercial Mortgage Trust 2014-1

DBRS Limited (DBRS) 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 52.0% as of the September 2017 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 2017 remittance, 41 loans remain in the pool with an aggregate outstanding principal balance of $87.3 million. As of September 2017, 30 loans have left the trust, including 29 loans that have fully repaid and one loan that was liquidated at a relatively small loss of $19,210 (loss severity of 1.2%) with the September 2016 remittance. Trust losses associated with that liquidation were 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 1.52 times (x) and 11.9%, respectively, based on the most recent year-end and quarterly reporting available for the individual loans. In addition, the top 15 loans are reporting a weighted-average positive net cash flow growth of 21.6% over the DBRS issuance figures. As of the September 2017 remittance, there are no loans in special servicing and four loans on the servicer’s watchlist, representing 8.4% of the current pool balance, three of which have been flagged for performance-related reasons. The largest loan on the watchlist, 1820 W. Webster Avenue (Prospectus ID#9, 4.8% of the current pool balance), was flagged for a decline in occupancy in Q1 2017. Since that time, however, occupancy has recovered and property performance is anticipated to rebound in the near term. One of the loans in the top 15 and another loan on the servicer’s watchlist are highlighted below.

The Gaslamp SD loan (Prospectus ID#4, 5.6% of the current pool balance) is secured by a 57,000 square foot (sf) retail property located in San Diego, California. The loan has been monitored since the single tenant (Reading Cinemas) vacated the property in July 2016 ahead of its scheduled November 2017 lease expiration. Following this tenant’s departure, the YE2016 DSCR fell sharply, to -1.72x, compared with a 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 at the time. At issuance, DBRS anticipated the tenant would likely vacate the property at lease expiration given the low sales volume. As of October 2017, CoStar shows that market dynamics for retail properties in the downtown San Diego Submarket have improved over the last 12 months, with an average vacancy and availability rate of 0.9% and 2.5%, compared with the October 2016 metrics of 10.0% and 14.2%, respectively.

According to the June 2017 rent roll, the property has been fully leased to an undisclosed tenant paying $35.09 psf (annual rent of $2.0 million) on a 20-year lease that commenced in November 2016. According to an online article from the San Diego Union Tribune dated March 14, 2017, it was announced that the property was preparing for an upscale multi-million-dollar renovation that would include an eight-screen replacement, coupled with the addition of a LandShark Bar & Grill and a celebrity-driven Sugar Factory restaurant. The “Theatre Box” project will include eight screens on the second floor with 815 seats, down from the original 15 screens with 2,906 seats, featuring food and drink service available at each seat. The LandShark Bar & Grill will open onto G Street and the Sugar Factory restaurant will be situated onto Fifth Avenue, featuring a Chocolate Lounge. The subject is reportedly scheduled for a grand reopening in the fourth quarter of 2017. DBRS has reached out to the servicer to confirm the status of this redevelopment and as of the date of this press release, the servicer’s response is pending.

Although the redevelopment, which is being funded out of pocket by the sponsor, brings challenges for the near term, the property does benefit from its desirable commercial location within the historic Gaslamp Quarter of downtown San Diego. According to Real Capital Analytics, comparable retail properties in the submarket have recently traded at price points between $270 psf and $336 psf. Those figures compare to the current trust exposure of $85 psf and an issuance value of $16.6 million ($291 psf). To capture the heightened risk to the trust during the renovation and the lack of cash flow at the property, DBRS applied a stressed cash flow in is analysis and will continue to monitor the loan for developments.

The 1900 Walker Ave loan (Prospective ID#46, 2.6% of the current pool balance) is secured by a 29,043 sf industrial building in Monrovia, California. The loan was added to the watchlist in April 2017 due to a decline in performance related to the in-place tenant at the property paying half rent since June 2016. According to the June 2017 rent roll, the property is 100% occupied by Hope Unlimited Church, which signed a ten-year lease commencing on June 2016, with the tenant paying a full rental rate of $11.09 psf, as of September 2017. As of October 2017, CoStar market data indicates comparable properties in the central Monrovia submarket ranging between 20,000 sf and 30,000 sf are achieving average rental rates of $10.54 psf with no vacancy and availability in the market. According to the August 2017 site inspection, the property was noted in Average condition and was being converted into a church at the time. In addition, it was noted that the subject is on a corner of a low travelled road, which fits in with the neighbouring buildings. Although the Q2 2017 DSCR was reported at 0.80x, compared with a YE2016 DSCR of 1.03x and the DBRS Term DSCR at issuance of 1.29x, the property performance is expected to stabilize given the increase in rental revenue from the single tenant at the property.

Class IO-A are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

The ratings assigned to Classes D, E and F materially deviate from the higher ratings implied by the quantitative results. 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 results that is a substantial component of a rating methodology. The deviations are warranted given 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.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.