Morningstar DBRS Changes Trends on Six Classes of WFRBS Commercial Mortgage Trust 2014-C23 to Negative from Stable, Confirms Credit Ratings on All Classes

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

Morningstar DBRS changed the trends on Classes X-B, D, X-C, E, X-D, and F to Negative from Stable. All other classes carry Stable trends.

The credit rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS' expectations since the last rating action in May 2023. However, there are some challenges for the pool, including a few loans that are facing elevated refinance risk, namely Bank of America Plaza (Prospectus ID#1, 15.9% of the pool), Crossing at Corona (Prospectus ID#2, 9.0% of the pool), and 677 Broadway (Prospectus ID#6, 3.4% of the pool), all of which are on the servicer's watchlist and have experienced net cash flow (NCF) or occupancy declines since issuance. While all three loans are current, updated value projections indicate value deficiencies as the loans approach their respective maturities, supporting the Negative trends. Where applicable, Morningstar DBRS increased the probability of default penalties (POD) and/or increased loan-to-value ratios (LTVs) to reflect the increased risk of maturity default. These adjusted loans had a weighted average (WA) expected loss that was 1.7 times (x) higher than the pool average. The majority of the remaining loans in the pool are scheduled to mature in Q2 and Q3 2024.

Mitigating these risks is the sizable remaining balance of $40.0 million in the unrated first loss certificate, which has not incurred loss to date, as well as the balance currently rated below investment grade by Morningstar DBRS across Classes D and E of approximately $29.4 million. Since last review, Columbus Square Portfolio (Prospectus ID#4, 9.4% of the pool) transferred to special servicing; however, Morningstar DBRS expects a moderate loss severity, if any, upon disposition. While not yet confirmed, several news articles indicate that a three-year loan extension has been executed. Excluding the four aforementioned loans and collateral that has been fully defeased, the pool reported a WA debt service coverage ratio (DSCR) of 1.80x based on the most recent year-end financials.

As of the April 2024 remittance, 67 of the original 70 loans remain in the trust, with an aggregate balance of $733.4 million, representing a collateral reduction of 22.2% since issuance. There are 30 loans, representing 28.7% of the pool, that are fully defeased. The pool is most concentrated by loans secured by retail and office properties, representing 25.0% and 22.6% of the pool, respectively. There are 34 loans on the servicer's watchlist, representing 61.5% of the pool; however, 25 of these loans are on the servicer's watchlist solely for upcoming maturity and reported a WA DSCR of approximately 2.15x as of the most recent year-end financials.

The largest loan in the pool, Bank of America Plaza, is secured by a 1.4 million-square-foot (sf) Class A office complex in the Central Business District of Los Angeles. While the loan saw an improvement in performance during 2023, reporting respective occupancy and NCF figures of 86.2% and $36.5 million (a DSCR of 2.23x) as of YE2023, over the YE2022 figures of 84.8% and $28.9 million (a DSCR of 1.76x), 13 tenants, representing 21.2% of the total net rentable area (NRA), have leases scheduled to expire prior to YE2024. According to the servicer, the fourth-largest tenant at the property, Alston & Bird LLP (5.6% of NRA), vacated upon lease expiry in December 2023, and the third-largest tenant at the property, Shepperd Mullin Richer (12.7% of NRA), has indicated it will vacate upon lease expiry in December 2024, dropping occupancy to an implied rate of 67.9%, shortly after loan maturity in September 2024, which could complicate takeout financing.

Vacancy and average asking rental rates for Class A office properties within a one-mile radius for YE2023 were reported at 14.6% and $46.00 per sf (psf), respectively, according to Reis. In comparison, the subject property achieved an average rental rate of $25.54 psf as of YE2023. Given the property's dated construction in 1974, with the most recent renovations reported in 2009, coupled with the anticipated increase in vacancy, Downtown Los Angeles location, and increased capitalization rate environment, property value would likely yield a significant decline as compared with the as-is value from issuance. The issuance LTV was moderate at 66.1%, providing some cushion against the value deterioration to date; however, Morningstar DBRS anticipates an elevated LTV well in excess of 100% if vacancy were to fall below 70.0%. As such, Morningstar DBRS analyzed the loan with a stressed LTV and an increased POD, resulting in an expected loss that was nearly 1.5x the pool average.

Another office loan of concern is 677 Broadway, 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 through September 2025 and interest-only (IO) payments through January 2023. The loan has since resumed full interest payments with deferred principal and interest repaid in full; however, loan coverage remains well below breakeven, with the trailing 12-month financials ended June 30, 2023, reporting a DSCR of 0.46x.

According to the June 2023 rent roll, the property was 70.2% occupied, a moderate increase from the YE2022 figure of 63.4% 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. According to Reis, the average asking rent and vacancy within a two-mile radius of the property were $22.4 psf and 14.1%, respectively, as of YE2023. In comparison, the subject property achieved an average rental rate of $13.90 psf as of the June 2023 rent roll. Given the high submarket vacancy, sustained performance declines, and below-market rental rates, the value has likely declined significantly from issuance with an implied Morningstar DBRS LTV of nearly 200% based on updated analysis, a factor that will significantly impede refinance efforts despite the short-term extension. As such, Morningstar DBRS analyzed the loan with a stressed LTV and an increased POD, resulting in an expected loss that was nearly 3.0x the pool average.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, or 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 https://dbrs.morningstar.com/research/427030 (January 23, 2024).

Classes X-A, X-B, X-C, X-D, and X-Y 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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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.

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

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.

DBRS Limited
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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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261
-- 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205

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 (July 17, 2023)

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