DBRS Morningstar Confirms All Classes of WFRBS Commercial Mortgage Trust 2014-C25

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-C25 issued by WFRBS Commercial Mortgage Trust 2014-C25 as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class PEX at AA (sf)
-- Class X-B at BBB (high) (sf)
-- Class D at BBB (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 overall stable performance of the transaction since last review and healthy maturity profile for the majority of loans in the pool, as evidenced by the pools weighted-average (WA) debt service coverage ratio (DSCR) of nearly 2.50 times (x) based on the most recent year-end financials available. In addition, a significant concentration of loans are secured by collateral that has been defeased while no loans are delinquent or in special servicing. Given that all the remaining loans in the pool are scheduled to expire during H2 2024, DBRS Morningstar also looked to a recovery analysis, supporting the rating actions taken during this review.

As of the September 2023 remittance, 51 of the original 59 loans remain in the trust, with an aggregate balance of $716.6 million, representing a collateral reduction of 18.2% since issuance. The pool benefits from 21 loans that are fully defeased, representing 30.1% of the pool. Six loans, representing 4.9% of the pool balance, are on the servicer’s watchlist, being monitored primarily for DSCR and/or occupancy concerns.

Excluding defeasance, the transaction is most concentrated by retail and office properties, which represent 34.2% and 13.2% of the pool balance, respectively. In general, the office sector has been challenged, given the low investor appetite for that property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. While select office loans in the transaction continue to perform as expected, DBRS Morningstar identified two office loans that exhibiting increased refinance risk as they approach maturity in 2024. In its analysis for this review, DBRS Morningstar applied stressed loan-to-value (LTV) ratios or increased probability of default assumptions for these loans and others exhibiting declines in performance. As a result of these stressed scenarios, the stressed office loans had a WA expected loss (EL) that was approximately five times the overall pool’s EL.

One of these loans, Madison Park Office Portfolio (Prospectus ID #8; 3.6% of the current pool balance), is secured by a seven-building, Class B office park totaling 482,835 square feet (sf) in Winston-Salem, North Carolina. While the loan poses no imminent performance concerns, DBRS Morningstar believes that it may face elevated refinance risk upon maturity, given the current office landscape. According to the August 2023 rent roll, the buildings were 93.0% occupied by four tenants. These tenants include Lowe’s Home Centers, Inc. (Lower’s; 35.1% of the net rentable area (NRA), lease expiry in December 2025), National General Management Corp. (33.2% of the NRA, lease expiry in March 2027), Blue Cross and Blue Shield of North Carolina (BCBS; 21.5% of the NRA, lease expiry in December 2023), and FarrellGas (3.1% of the NRA, lease expiry in April 2024).

At issuance, BCBS occupied 136,700 sf (28.3% of the NRA) of the property, but in 2022 gave back approximately 40,000 sf (8.2% of the NRA), which remain vacant as of the August 2023 rent roll. The tenant has occupied space at the subject since 1998 and retains one three-year extension option; however, given its recent downsizing and upcoming lease expiry in December 2023, DBRS Morningstar has asked the borrower if the tenant intends to renew. While no leasing update has been provided to date, LoopNet shows no dramatic increases in availability signaling the tenant’s departure. In addition, the loan is structured with a cash flow sweep specific to BCBS if it does not renew at least 12 months prior to lease expiration expected to be approximately $1.0 million upon lease expiration.

The largest tenant, Lowe’s, also has an upcoming lease expiry in December 2025. While Lowe’s retains no extension options, the tenant has been in occupancy since 2005 and has invested roughly $50.0 million into its space prior to securitization to build out the space to serve as one of its two major data centers. Given the capital investment along with the specially designed systems, the tenant should be motivated to renew. In addition, the loan is structured with a general cash flow sweep to be triggered 47 months prior to the loan maturity until a tenant improvement/leasing commission reserve of $15 per square foot (psf) has been achieved for any tenant rolling in 2024 or 2025. Per the September 2023 loan level reserve report, there was a balance of approximately $350,000 across replacement reserve and leasing reserve accounts.

According to the financials for the trailing three months ended March 31, 2023, the loan reported an annualized net cash flow (NCF) of $2.8 million (a DSCR of 1.59x), compared with the YE2022 figure of $3.2 million (a DSCR of 1.81x) and the Issuer’s figure of $2.4 million (a DSCR of 1.31x). Per Reis, office properties in the West-Northwest Forsyth submarket reported an average vacancy rate of 19.9% with an average effective rental rate of $13.83 psf, higher than the average rental rate of $9.08 psf at the subject. Although there are mitigating factors, such as the tenants’ long tenures at the subject with below-market rates and cash traps associated with lease expirations, the general uncertainty surrounding such a significant tenant concentration prior to loan maturity paired with the soft market conditions, increases the loan’s refinance risk. As such, the loan was analyzed with a stressed LTV assumption, which increased the loan’s EL to be nearly five times the overall pool’s EL.

At issuance, St. Johns Town Center (Prospectus ID#1; 14.0% of the current pool balance) was shadow-rated investment grade. With this review, DBRS Morningstar confirms that the loan remains consistent with investment-grade performance characteristics.

ENVIRONMENTAL, SOCIAL, AND 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, X-C, and X-D 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 credit ratings are subject to surveillance, which could result in credit 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 (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 credit ratings assigned to Classes D, E, and F materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is the uncertain loan-level event risk tied to the loans backed by office properties and the loans on the servicer’s watchlist. In its analysis for this review, DBRS Morningstar analyzed loans exhibiting declines in performance with a conservative assumptions given the associated refinance risk with all loans maturing prior to YE2024; however the pool has a relatively healthy maturity profile, with a WA DSCR of nearly 2.50x based on the most recent year-end financial reporting available, with no delinquent or specially serviced loans.

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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

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

The credit 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/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023), 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 (September 22, 2023), https://www.dbrsmorningstar.com/research/420984

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://www.dbrsmorningstar.com/research/415687

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

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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