Morningstar DBRS Downgrades Credit Ratings on Seven Classes of WFRBS Commercial Mortgage Trust 2014-C21, Changes Trends on Five Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-C21 issued by WFRBS Commercial Mortgage Trust 2014-C21 as follows:

-- Class B to A (sf) from AA (low) (sf)
-- Class C to BBB (sf) from A (low) (sf)
-- Class X-B to B (high) (sf) from BBB (low) (sf)
-- Class D to B (sf) from BB (high) (sf)
-- Class E to CCC (sf) from B (low) (sf)
-- Class X-C to C (sf) from B (sf)
-- Class PEX to BBB (sf) from A (low) (sf)

Morningstar DBRS also confirmed its credit ratings on the remaining classes as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class F at CCC (sf)

In addition, Morningstar DBRS changed the trends on Classes B, C, D, X-B, and PEX to Negative from Stable. Classes E, F, and X-C have credit ratings that do not generally carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. All other classes have Stable trends.

As of the January 2024 remittance, 89 of the original 121 loans remain in the trust, with an aggregate balance of $939.2 million, representing a collateral reduction of 34.0% since issuance. All of the remaining loans in the pool are scheduled to mature in the next six months and the credit rating downgrades and Negative trends reflect concerns regarding increased maturity default risk for a number of loans given performance declines since issuance and/or likely value declines amid the current stressed environment for commercial real estate. Specifically, eight performing (current) loans, collectively representing 20.7% of the pool balance and including the largest loan in the pool (Fairview Park Drive, Prospectus ID#1, 9.6% of the current pool balance), have been identified by Morningstar DBRS to be at risk for maturity default. These loans were analyzed with a stressed scenario for this review. In addition, there are two loans with the special servicer, representing 6.0% of the current pool balance, both of which were analyzed with a liquidation scenario with this review, resulting in projected losses exceeding $14.0 million.

The pool benefits from 37 loans that are fully defeased, representing 30.5% of the pool. A previously specially serviced loan, Oak Court Mall (Prospectus ID#15), was liquidated from the trust with the December 2023 remittance reporting, with a $13.1 million loss to the trust. The realized loss was slightly above Morningstar DBRS' loss expectations of $11.7 million at last review as the sales price was below estimates based on the latest appraisal available at the time. To date, the trust has had $31.6 million in realized losses, which have been contained to the nonrated Class G, which had a remaining balance of $18.9 million as of the January 2024 remittance. Excluding defeased loans, the pool is most concentrated by loans collateralized by office properties, which account for 33.2% of the total pool balance and include three of the top five loans in the pool and six of the eight performing loans, which Morningstar DBRS expects to have elevated refinance risk. The current stressed environment has been concentrated in the office sector, with limited refinance options for borrowers with loans coming due amid lower tenant demand and general uncertainty for the property type.

The largest loan in special servicing, Tryp by Wyndham Times Square (Prospectus ID#8, 4.1% of the current pool balance), is secured by a lodging property in the Theatre District New York’s Midtown neighborhood. The loan transferred to special servicing in April 2020 because of imminent monetary default and the special servicer and borrower continue to negotiate the workout with the special servicer’s commentary suggesting a forbearance or a discounted payoff have been discussed. Updated financial reporting has been spotty. According to the most recent information on file with Morningstar DBRS, a December 2022 STR report, the property reported a trailing twelve-month (T-12) occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) of 78.6%, $250.51, and $196.99, respectively, which represents a RevPAR penetration of 111.8%. Metrics at that time continued to lag pre-coronavirus pandemic YE2019 levels when RevPAR was reported at $229.23. Based on the July 2022 appraisal, the property was valued at $56.6 million, which is unchanged from the October 2021 value but is ultimately 34.9% less than the $87.2 million appraised value at issuance. Based on a haircut to the July 2022 appraisal, Morningstar DBRS assumed a liquidation scenario for this loan, resulting in a loss severity above 20%.

The second loan in special servicing is the Rock Pointe East (Prospectus ID#17, 2.1% of the current pool balance) loan, which is secured by an office property in Spokane, Washington. The collateral forms the east campus of a larger property known as the Rock Pointe Corporate Center. The loan transferred to the special servicer in May 2023 and according to the special servicer, the borrower has offered a deed in lieu of foreclosure, which is currently under review. The collateral property has reported occupancy declines from issuance, with the December 2023 rent roll showing an occupancy rate of 57.5%. A recent 10-year lease signing for Aging and Long Term Care of Eastern Washington (13.7% of net rentable area (NRA)) is scheduled to commence in March 2024, which is expected to raise occupancy to 71.2%. Still, occupancy continues to lag the issuance level of 98.3%. The largest tenant at the property is Engie Insight Services Inc (45.8% of the NRA, lease expiring in November 2030), followed by State of Washington (3.4% of the NRA, lease expiring in March 2024). As per Reis, office properties within the central business district submarket of Spokane reported a Q4 2023 vacancy rate of 19.5% with an average asking rate of $20.98 per square foot (psf), higher than the subject's average rental rate of $15.27 psf as per the December 2023 rent roll. The property was reappraised in July 2023 at $21.8 million, representing a 27.0% decline from the issuance value of $29.8 million. Based on a haircut to this value, Morningstar DBRS liquidated this loan in the analysis for this review and the resulting loss severity was above 30%.

In addition to the specially serviced loans in the pool, Morningstar DBRS expects at least eight loans representing 20.7% of the pool balance are at risk for maturity default, including three top 15 loans which are all secured by office property types. The largest, Fairview Park Drive, is secured by an office property in Falls Church, Virginia. Although the cash flows have rebounded from the lows reported in 2021, with a healthy debt service coverage ratio (DSCR) of 1.91 times (x), the loan’s interest-only (IO) structure provides no cushion against the likely decline in the property’s value amid the rise in cap rates in the last few years. As such, Morningstar DBRS expects there will be a significant refinance gap that could exceed $30 million, significantly increasing the risks for this loan. Similarly, the Cedar Crest Professional Park (Prospectus ID #5, 5.3% of the pool) and The Lovejoy (Prospectus ID #14, 2.6% of the pool) loans are also reporting healthy DSCRs near or slightly above 1.50x, but both collateral properties have depressed occupancy rates and likely significant value declines that will make a refinance less manageable. In the case of those two loans, Morningstar DBRS estimates a refinance gap of approximately $9.0 million and $13.5 million, respectively.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, and X-C 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

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

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

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.
Morningstar DBRS 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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in its maturity year. In those cases, the Morningstar DBRS credit ratings are typically based on a recoverability analysis for the remaining loans.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

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

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/422859

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261)

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

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://dbrs.morningstar.com/research/425081

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

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