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

DBRS, Inc. (DBRS Morningstar) confirmed 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 at AA (sf)
-- Class F at BBB (high) (sf)

The trend on Class F remains Positive, and the trend on Class E remains Stable.

These rating actions reflect the continued improved credit support for the rated bonds as a result of collateral reduction for the pool overall. As of the February 2022 remittance, just nine of the original 71 loans remain in the pool, representing a collateral reduction of 88.2% since issuance. There has been a small $106,121 realized loss to the trust since issuance, which remains confined to the unrated Class G certificate. As of the February 2022 remittance, there were three loans, representing 28.1% of the pool, on the servicer’s watchlist, and each of these loans were on the watchlist for low debt service coverage ratios (DSCRs) relating to performance declines as a result of the Coronavirus Disease (COVID-19) pandemic. One loan, representing 20.0% of the pool, is in special servicing and is discussed below. In general, DBRS Morningstar believes the rated bonds are generally well protected against significant loss given there remains over $9.0 million in the unrated Class G certificate and the majority of the remaining loans are expected to repay or resolve with relatively small loss amounts.

The single loan in special servicing is Gaslamp SD (Prospectus ID#4; 20.0% of the pool), which is secured by a 57,000-square-foot (sf) free-standing movie theater in the Gaslamp Quarter of San Diego. The property was built in 1997 and at issuance was 100% leased to a 15-screen Reading Cinema. After the original tenant vacated in Q2 2016, ahead of its November 2017 lease expiration, the interior was renovated and backfilled by an upscale eight-screen movie theater known as Theatre Box. Theatre Box, which opened in 2018, is associated with the iconic TCL Chinese Theatre in Los Angeles and offers a similar luxury experience to its Los Angeles counterpart. The renovation also included the addition of a 5,000-sf rooftop lounge and two restaurants—a 14,000-sf Sugar Factory American Brasserie and a food hall concept called Gaslamp Ghost Kitchen; however, it appears Gaslamp Ghost Kitchen may have permanently closed as a result of the pandemic.

Amid the coronavirus pandemic, the loan transferred to special servicing in October 2020, when the borrower indicated debt service payments would no longer be made. The servicer’s reporting as of the February 2022 remittance states that the loan is current and at the special servicer. A forbearance was executed that deferred principal payments from December 2020 through August 2021, to be repaid over the next 12 months, and temporarily converted the loan from principal and interest (P&I) payments to interest-only payments. The latest servicer commentary confirms that while the tenant has continued to operate at limited capacity and is having difficulty making full rent payments, the borrower remains current and in compliance with the terms of the forbearance agreement. The borrower has resumed full P&I payments and is currently in the repayment period of the deferred principal amount.

The largest loan on the servicer’s watchlist is 6130 Tyvola Centre Drive (Prospectus ID#8; 20.4% of the pool), which is secured by an office property on the outskirts of Charlotte, North Carolina. At issuance, the property was 100% occupied by the Department of Homeland Security, under a lease with the General Services Administration, with a scheduled expiration date in July 2023. The loan was added to the servicer’s watchlist in November 2021 for a low DSCR. According to the servicer commentary, the trailing six months ended June 30, 2021, DSCR has declined to 0.76 times (x) from 1.93x at YE2020. The servicer notes that, as there has been no indicated change in occupancy, the low DSCR is likely a result of the tenant not paying rent for a period, and the servicer is awaiting further clarification. It should also be noted that the loan has a scheduled maturity date in July 2022, which, with the lease expiration of the single tenant one year past expiration, suggests elevated refinance risk 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.

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 loan in special servicing and larger loans on the servicer’s watchlist. In addition, although the credit support in the transaction structure is generally quite favorable for the rated classes in the pool, the deal has also become significantly more concentrated, with just nine loans remaining, increasing the trust’s exposure to loan level event risk.

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 (20.0% of the pool)

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 the North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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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