DBRS Morningstar Upgrades Ratings on ReadyCap Commercial Mortgage Trust 2014-1

DBRS Limited (DBRS Morningstar) upgraded its ratings on the ReadyCap Commercial Mortgage Trust 2014-1 Commercial Mortgage Pass-Through Certificates issued by ReadyCap Commercial Mortgage Trust 2014-1 as follows:

-- Class E to AA (sf) from A (high) (sf)
-- Class F to BBB (high) (sf) from BBB (low) (sf)

In addition, the trend on Class F has been changed to Positive from Stable. The trend on Class E remains Stable.

These rating actions reflect the significantly improved credit support for the rated bonds as a result of collateral reduction for the pool overall, as well as DBRS Morningstar’s generally favourable outlook for the deal’s performance over the remaining life of the transaction. As of the February 2021 remittance, 12 of the 71 original loans remain in the pool, representing a collateral reduction of 85.9% since issuance. In the last 12 months, the pool has been paid down by approximately $7.8 million, with two loans repaying in full. There has been a small $19,210 loss to the trust since issuance, which was incurred with the disposition of the 764-766 Palisade Ave. and 780 Palisade Ave. loan in 2016. As such, the unrated Class G certificate retains most of the $9.5 million first-loss cushion structured at issuance, with the lowest-rated Class F certificate benefitting from credit enhancement of 36.7% as of the February 2021 remittance.

There are two loans, representing 5.4% of the current trust balance, on the servicer’s watchlist as of the February 2021 remittance. The servicer is monitoring these loans for performance declines as a result of the Coronavirus Disease (COVID-19) pandemic, with both loans reporting a low debt service coverage ratio (DSCR). Additionally, the pool has two loans, representing 21.7% of the pool, in special servicing. The two loans in special servicing are Gaslamp SD (Prospectus ID#4; 17.3% of the pool) and 3629-3639 Walton Way Extension (Prospectus ID#28; 4.4% of the pool).

Gaslamp SD transferred to special servicing in October 2020, when the borrower indicated debt service payments would no longer be made. The loan is secured by a freestanding movie theatre in the Gaslamp Quarter of San Diego. At issuance, the property was 100% leased to a 15-screen Reading Cinema. After Reading Cinema vacated in Q2 2016, the interior was renovated and replaced by an upscale, eight-screen Theatre Box, which is associated with the iconic TCL Chinese Theatre in Los Angeles. In addition to the theatre, the property features Gaslamp Ghost Kitchen, a celebrity-driven Sugar Factory restaurant, and a 5,000-square-foot rooftop bar. Loan performance prior to the coronavirus pandemic was very strong, with a YE2019 DSCR of 3.86 times (x) and a YE2018 DSCR of 4.28x, compared with 3.12x at issuance. Although the property has been largely closed over the last year because of the pandemic, with the borrower unable or perhaps unwilling to support the loan out of pocket, DBRS Morningstar notes mitigating factors in the property’s historically strong performance, the overall desirability of the property and location, and the low going-in loan-to-value of 31.0%. To account for the increased risks of the extended delinquency and the likelihood that the pandemic’s effects will affect traffic through the medium to longer term, a probability of default penalty was applied to increase the expected loss for this loan in the analysis for this review.

DBRS Morningstar assumed a liquidation scenario for the smaller loan in special servicing, 3629-3639 Walton Way Extension. The loan is secured by a neighbourhood shopping center in Augusta, Georgia, and was transferred to special servicing in June 2019 for imminent default after the property’s largest tenant, Gold’s Gym (75.8% of the net rentable area (NRA)), vacated ahead of the April 2021 lease expiry. According to an online search by DBRS Morningstar, the largest remaining tenant, Redneck Riviera Productions (9.0% of the NRA through November 2021), also appears to be permanently closed. After the departure of Gold’s Gym, the sponsor was funding shortfalls out of pocket up until October 2020, when the loan ultimately fell delinquent. In the liquidation scenario, a substantial haircut was applied to the issuance value given the extended period of elevated vacancy for the property prior to the onset of the pandemic, a risk factor that has since been exacerbated by the effects of pandemic-related uncertainty, resulting in a loss severity of approximately 57.0%.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class F as the quantitative results suggested a higher rating. The material deviation is warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist. In addition, although the credit support in the transaction structure is generally quite favourable for the rated classes in the pool, the deal has also become significantly more concentrated, with just 12 loans remaining. As such, unforeseen issues with one or two loans could be significantly more impactful at the transaction level, a significant part of the rationale for the deviation.

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#4 – Gaslamp SD (17.3% 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 [email protected].

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 [email protected].

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