DBRS Morningstar Downgrades Six Classes and Discontinues One Class of WFRBS Commercial Mortgage Trust 2014-C20

DBRS Limited (DBRS Morningstar) downgraded the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2014-C20 issued by WFRBS Commercial Mortgage Trust 2014-C20 as follows:

-- Class B to A (low) (sf) from AA (low) (sf)
-- Class C to BBB (low) (sf) from A (low) (sf)
-- Class D to CCC (sf) from BBB (low) (sf)
-- Class E to C (sf) from BB (low) (sf)
-- Class F to C (sf) from B (low) (sf)
-- Class X-B to B (low) (sf) from BBB (sf)

In addition, DBRS Morningstar confirmed the remaining classes as follows:

-- 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 A-SFL at AAA (sf)
-- Class A-SFX at AAA (sf)
-- Class X-A at AAA (sf)

In addition, DBRS Morningstar discontinued its ratings on Class X-C as it references a Class with a C (sf) rating.

All trends are Stable with the exception of Classes B, C, and X-B, which have a Negative trend. In addition, Classes D, E, and F have ratings that do not carry a trend. With this review, DBRS Morningstar removed Classes D, E, F, X-B, and X-C from Under Review with Negative Implications where they were placed on August 6, 2020.

The downgrades and Negative trends generally reflect the overall weakened performance of the collateral since the last review and the increased likelihood of losses to the trust upon the resolution of the specially serviced loans and, more specifically, the anticipated loss to the trust upon the resolution of the transaction’s largest loan (Woodbridge Center). In addition, the pool’s high concentration of retail properties, representing 39.8% of the pool, is noteworthy as this property type has been most acutely affected by the Coronavirus Disease (COVID-19) pandemic.

As of the February 2021 remittance, 82 of the original 98 loans remain in the pool, with an aggregate principal balance of $918.3 million, representing a collateral reduction of 26.6% since issuance as a result of loan repayment, scheduled loan amortization, and the liquidation of a single loan as the trust incurred a loss of $0.8 million after a discounted payoff of a specially serviced loan in February 2021. Twelve loans, representing 7.0% of the current pool balance, are fully defeased.

Five loans, totaling 25.5% of the trust balance, are in special servicing. Four of the loans transferred to the special servicer during the coronavirus pandemic, one of which is higher risk because it is secured by a Class B regional mall that showed weakened performance prior to the pandemic. Another loan is secured by a Houston office property, which also had a large increase in vacancy prior to the outbreak of the coronavirus pandemic.

The Woodbridge Center is a pari passu loan that is secured by the fee interest in a 1.1 million sf portion of a 1.7 million sf super-regional mall in Woodbridge, New Jersey, approximately 30 miles southwest of New York City. The Class B mall was originally built in 1971 and is owned and operated by affiliates of Brookfield Property Partners (Brookfield). The mall has reported cash flow declines for several years and with the closure of the former Lord & Taylor anchor in January 2020 and shortly thereafter, the closure of the Sears anchor in February 2020, the property was struggling even before the coronavirus pandemic. In May 2020, the loan transferred to special servicing due to imminent default and as of the February 2021 remittance, the loan was most recently paid in April 2020.

Although the servicer’s reporting has consistently showed a DSCR above 2.0 times (x) for both pieces of this loan, the debt service calculation does not appear to be correct as the reported net cash flow (NCF) figures have consistently held below the issuer’s figure since YE2016, with an issuer’s DSCR of 1.42x. The YE2019 DSCR of 2.19x reported by the servicer should be approximately 1.13x using the full debt service figure and the servicer’s reported NCF figure, which is 20.1% below the issuer’s NCF.

According to the February 2021 commentary, the special servicer continues to discuss possible workout strategies for the loan. As previously highlighted, the collateral was reappraised in December 2020 for a value of $104.0 million, drastically down by 71.6% from the $366.0 million appraised value at issuance. The 2020 value implies an in-place loan-to-value ratio of 226.3%, compared with 64.91% at issuance. Contributing factors to the lower value include the two dark anchor spaces, the relatively low inline sales for the property that could suggest further occupancy loss and, likely low demand for the property should it be marketed for sale in the current environment. The most recent sales report on file with DBRS Morningstar, dated December 2018, showed tenants less than 10,000 sf reported sales of $357 psf, which was up by 1.7% from the prior year. Based on the December 2020 value, DBRS Morningstar liquidated the loan in the analysis for this review, a scenario that resulted in an implied loss severity in excess of 70.0%.

The second-largest loan in special servicing, Sugar Creek – I & II ( Prospectus ID#4, 6.6% of the current trust balance), transferred to special servicing in October 2020. The loan is secured by two adjacent Class A office buildings in Sugar Land, Texas, approximately 18 miles southwest of the Houston CBD. As of the February 2021 reporting, the loan was 30-plus days delinquent with a workout strategy yet to be determined. The servicer notes that negotiations for relief are ongoing and that the loan is in default as the mezzanine loan is also delinquent. This loan has been on the DBRS Morningstar Hotlist since February 2019 because of concerns surrounding the three largest tenants, which had lease expirations in 2019.

The largest tenant, Noble Drilling Services (Noble) (26.3% of the net rentable area (NRA)), reduced its footprint by approximately 61,000 sf as part of a 10-year renewal that expires in January 2029, while the second- and third-largest tenants, United Healthcare Services (12.9% of NRA) and ICON Clinical Research (6.2% of NRA), vacated upon their respective lease expirations in April and March 2019. As of the August 2020 rent roll, the property was 69.7% occupied, well below historical rates, which generally hovered around 90.0%. The loan reported a T-6 ended June 2020 DSCR of 1.04x for the trust loan debt and 0.95x for the whole loan debt, which is indicative of the actual performance since the increased vacancy rate. Given the extremely soft market condition in the Houston MSA, the subject’s submarket of Southwest Houston, which reported a vacancy rate of 25.0% in Q4 2020, and the recent delinquency and request for relief, DBRS Morningstar has elevated the probability of default for this loan.

There are 16 loans, representing 24.3% of the current trust balance, on the servicer’s watchlist. The servicer is monitoring these loans for a variety of reasons, including low debt service coverage ratio and occupancy issues; however, the primary reason for the increase of loans on the watchlist is the coronavirus-driven stress for retail and hospitality properties, with watchlisted loans backed by those property types generally reporting a declining DSCR.

The second-largest loan on the servicer’s watchlist is Brunswick Square (Prospectus ID#6, 4.5% of the current trust balance), which is secured by a 292,685-sf portion of a 760,311-sf regional mall in East Brunswick, New Jersey. The loan initially transferred to special servicing for imminent default at the borrower’s request in June 2020, following a three-month closure of the mall but was returned to the master servicer with no modifications in November 2020 as the borrower indicated its commitment to making payments without relief. While the loan is current as of the February 2021 reporting, despite performance-related declines with coverage falling below breakeven, the sponsor, Washington Prime Group (WPG), missed a February 2021 payment on its corporate debt and hired restructuring consultants, seemingly indicating that the firm is experiencing financial difficulties.

The mall is anchored by noncollateral tenants Macy’s (244,000 sf) and JCPenney (223,626 sf), both of which are concerning given their plans for additional store closures throughout the country. While collateral occupancy has reported only minor declines in occupancy recently, falling to 90.7% in September 2020 from 93.8% in December 2019, there are 14 tenants (21.5% of the NRA) that have had recent lease expirations, while another six tenants (8.1% of the NRA) have lease expirations scheduled prior to year-end 2021. Collateral rental rates at the property have fallen to $21.37 psf in September 2020 from $26.12 psf at issuance, representing an 18.2% decline. Given the concerns surrounding the sponsorship, paired with the recent decline in performance and increasing rollover risk, DBRS Morningstar has significantly elevated the probability of default for this loan.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Woodbridge Center (13.3% of the pool)
-- Prospectus ID#3 – Worldgate Centre (6.2% of the pool)
-- Prospectus ID#4 – Sugar Creek I and II (6.6% of the pool
-- Prospectus ID#6 – Brunswick Square (4.5% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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