DBRS Morningstar Confirms Ratings on All Classes of Wells Fargo Commercial Mortgage Trust 2014-LC16

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC16 issued by Wells Fargo Commercial Mortgage Trust 2014-LC16 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 X-A at AAA (sf)
-- Class B at BBB (low) (sf)
-- Class C at C (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)

All trends are Stable, with the exception of Classes C, D, E, and F, which have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings.

The rating confirmations reflect the overall stable performance of the transaction since DBRS Morningstar’s last review. The C (sf) ratings for Classes C, D, E, and F are reflective of DBRS Morningstar’s loss expectations for the largest loans in special servicing, as further described below. The trust is secured by a high concentration of loans collateralized by retail properties, which represent more than 50.0% of the current pool balance—including two top 15 loans secured by regional malls that are delinquent and in special servicing. However, the transaction benefits from substantial paydown since issuance, as well as a moderate amount of defeasance.

As of the January 2023 remittance, 61 of the original 82 loans remained in the pool, representing a collateral reduction of 33.4% since issuance. Nineteen loans, representing 20.8% of the current pool balance, were fully defeased. Four loans were in special servicing and 12 loans were on the servicer’s watchlist, representing 21.9% and 16.3% of the current pool balance, respectively. The loans on the servicer’s watchlist were primarily being monitored for performance concerns related to low occupancy and/or debt service coverage ratios (DSCRs).

The largest loan in special servicing, Woodbridge Center (Prospectus ID#1; 18.1% of the pool), is secured by the fee-simple interest in a 1.1 million-square-foot (sf) portion of a 1.7 million-sf super-regional mall in Woodbridge, New Jersey. The loan is pari passu with the WFRBS Commercial Mortgage Trust 2014-C20 transaction, which is also rated by DBRS Morningstar. The loan transferred to special servicing in June 2020 for payment default. Initially, the special servicer was discussing a potential loan modification with the sponsor, but those discussions ultimately fell through and a receiver was installed in October 2021. As of the January 2023 remittance, the loan was delinquent, having last paid in March 2022. The servicer reporting foreclosure proceedings are under way. The collateral was appraised in May 2022 with an as-is value of $89.0 million, within $15.0 million of the previous value obtained by the special servicer, but well below the issuance value of $366.0 million.

The loan’s performance has followed the path of the mall’s occupancy declines over the last several years, beginning with the loss of the collateral Sears anchor, which represented 25.0% of the collateral’s net rentable area (NRA) and closed in April 2020. According to the June 2022 rent roll, the collateral was 62.4% occupied, compared with the December 2021 occupancy rate of 67.5% and the issuance occupancy rate of 96.8%. The mall is anchored by a noncollateral Macy’s and JCPenney, while the largest remaining collateral tenants include Boscov’s (16.7% of the NRA; expiry in January 2029) and Dick’s Sporting Goods (9.1% of the NRA; expiry in January 2024). Near-term rollover risk is noteworthy, with tenants representing 15.1% of the NRA approaching their lease expiry within the next 12 months. For the trailing nine month period ended September 2022, the servicer reported a DSCR of 0.42 times (x), down from the YE2021 DSCR of 0.95x and YE2020 DSCR of 1.77x. DBRS Morningstar applied a 15.0% haircut to the May 2022 appraisal value resulting in an implied loss severity in excess of 80.0%.

The second-largest specially serviced loan, Oak Court Mall (Prospectus ID#18; 2.2% of the pool), is secured by a 240,197-sf portion of a 723,014-sf super-regional mall in Memphis, Tennessee. The loan is pari passu with the WFRBS Commercial Mortgage Trust 2014-C21 transaction, which is also rated by DBRS Morningstar. The loan transferred to special servicing in May 2020 for imminent monetary default and failed to repay at its scheduled April 2021 maturity. The property has both retail and office components and according to the servicer’s commentary, the occupancy rate for the retail segment was 74.2% and the office segment was 89.2% as of December 2022. Overall, occupancy at the property has been declining, with the September 2021 occupancy rate at 76.2%, compared with the YE2020 occupancy rate of 98.5%. The drop in occupancy was due to the departure of Dillard’s Men’s, which vacated the subject in January 2021. The mall is anchored by a noncollateral Macy’s (53.2% of mall NRA; lease expiration in September 2044) and Dillard’s (13.5% of mall NRA; lease expiration in August 2038). The three largest in-line tenants are H&M (8.3% of collateral NRA; lease expiration in January 2027), New Square (3.5% of collateral NRA; lease expiration in September 2024), and The Shoe Department (3.0% of collateral NRA; lease expiration in November 2023).

The special servicer is pursuing a foreclosure considering the sponsor, Washington Prime Group Inc., had indicated its desire to transfer the title to the trust. A receiver was appointed, and the loan is currently cash managed. According to the March 2022 appraisal, the subject was valued at $26.1 million, an increase from the April 2021 value of $15.5 million but still below the issuance value of $61.0 million and the outstanding whole-loan balance of $33.8 million. Given the property’s declining performance and value, market positioning, nearby competition from the Wolfchase Galleria shopping mall, and general lack of liquidity for this property type, DBRS Morningstar expects a loss severity in excess of 50% could be realized at resolution.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Class X-A is an interest-only (IO) certificate that references 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.

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

The principal methodology is the North American CMBS Surveillance Methodology (October 3, 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 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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