DBRS Morningstar Confirms Ratings on All Classes of WFRBS Commercial Mortgage Trust 2014-C23

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-C23 issued by WFRBS Commercial Mortgage Trust 2014-C23:

-- 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 X-Y at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)
-- Class X-B at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-C at BB (high) (sf)
-- Class E at BB (sf)
-- Class X-D at B (high) (sf)
-- Class F at B (sf)

All trends are Stable. The rating confirmations reflect the stable performance of the transaction since the last rating action.

As per the May 2023 remittance, 67 of the original 92 loans remain in the pool, with an aggregate principal balance of $750.6 million, representing a collateral reduction of 20.2% since issuance as a result of loan amortization and repayment. Additionally, there are 24 loans, representing 21.6% of the current pool balance, that are fully defeased. Since the last rating action, the fifth-largest loan in the pool (Centennial Center & Two Century Center, 5.2% of the pool balance) has fully defeased. By property type, the pool consists primarily of retail and office properties, representing 25.7% and 25.5% of the pool, respectively. Fifteen loans, representing 43.7% of the current pool balance, are on the servicer’s watchlist and are being monitored primarily for low occupancy rates, cash flows, and debt service coverage ratios (DSCR). There are no loans currently in special servicing.

In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets following the shift in workplace dynamics since the onset of the Coronavirus Disease (COVID-19) pandemic. In its analysis, DBRS Morningstar stressed the probability of default (POD) and/or loan-to-value (LTV) ratio where applicable for loans backed by office and other properties or otherwise exhibiting increased risks from issuance. The resulting weighted-average expected loss for these loans was approximately 16% higher than the overall pool average.

The largest loan in the pool, Bank of America Plaza (Prospectus ID#1, 15.5% of the pool), is secured by a 1.4 million-square-foot (sf) Class A office complex in the central business district of Los Angeles. The loan saw a decline in performance throughout 2022, reporting a net cash flow (NCF) of $28.9 million (a DSCR of 1.76 times (x)) for YE2022, a decrease from $34.4 million (a DSCR of 2.10x) at YE2021 and $34.2 million at issuance. The property was 84.8% occupied as of the December 2022 rent roll, relatively flat from the December 2021 occupancy figure of 84.3%. Throughout 2023, 17 tenants, representing 10.0% of total NRA, have leases scheduled to expire, and 10.6% of the total NRA is scheduled to roll before the loan’s maturity in May 2024. Additionally, according to the servicer, the fourth-largest tenant at the property, Alston & Bird LLP (5.6% of total NRA), will vacate upon lease expiry in December 2023. Vacancy and average asking rental rates for Class A office properties within a one-mile radius for YE2022 were reported at 13.0% and $42.30 per sf (psf), respectively, according to Reis. In comparison, the subject property achieved an average rental rate of $25.54 psf as of the YE2022 rent roll. Given the increased vacancy in the submarket and DBRS Morningstar’s cautious outlook on office properties, DBRS Morningstar has elected to take a conservative approach in its review and applied a stressed LTV ratio and stressed POD for this loan. The resulting expected loss for this loan is approximately 0.7x the pool average.

Another driver in DBRS Morningstar’s expected loss figure is 677 Broadway (Prospectus ID#6, 3.4% of the pool), which is secured by a 177,039-sf Class A office building built in 2005 and located in Albany, New York. The loan transferred to the special servicer in May 2020 for imminent default following a decline in occupancy to 67.0% from 91.0% at YE2019 because of tenant departures and downsizing, as well as a lack of leasing momentum during the pandemic. In October 2020, the mezzanine holder took possession of the loan after remitting funds to cure loan delinquencies. The loan was then modified, including terms of a one-year maturity extension to September 2025 and interest-only (IO) payments through January 2023. The initial decreased pay rate included 2.0% IO payments between February 2021 and January 2022, followed by 3.0% payments from February 2022 through January 2023. The loan has since resumed full interest payments at a 4.48% coupon. Deferred principal and interest were to be repaid from excess cash flows; however, the YE2022 DSCR was reported to be 0.32x, indicating there is no excess cash flow to fund these payments. The loan has remained on the servicer’s watchlist since August 2021.

According to the October 2022 rent roll, the property was 65.6% leased and 58.6% occupied, a moderate increase from the YE2021 figure of 59.6% but well below the issuance figure at 96.2%. The largest five tenants at the property account for 46.4% of total NRA, with the earliest expiration in May 2026. Since October 2022, two new tenants, representing 4.4% of total NRA, have signed leases that commenced rent payments in February 2023. Three tenants, representing 12.4% of total NRA, have scheduled lease expirations in 2023. According to Reis, the average asking rent and vacancy within a two-mile radius of the property were $19.30 psf and 21.0% as of YE2022. In comparison, the subject property achieved an average rental rate of $13.90 psf as of the October 2022 rent roll. Per the annualized trailing nine-month financials ended September 30, 2022, the loan reported an NCF of $63,000, a decline from YE2021 at $308,000 and the issuance figure of $2.7 million. Given the high submarket vacancy, declining cash flows and below-market rental rates, DBRS Morningstar was conservative in its approach and applied a stressed LTV ratio and stressed POD, resulting in an expected loss that was more than 3.0x the pool’s expected loss.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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).

Classes X-A, X-B, X-C, X-D, and X-Y are 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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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