Morningstar DBRS Confirms Credit Ratings on WFRBS Commercial Mortgage Trust 2014-C20

DBRS, Inc.(Morningstar DBRS) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-C20 issued by WFRBS Commercial Mortgage Trust 2014-C20 as follows:

-- Class B at BB (high) (sf)
-- Class C at CCC (sf)

Morningstar DBRS changed the trend on Class B to Negative from Stable. Class C has a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS).

The Negative trend on the Class B certificate, as well as the credit rating confirmation on the Class C certificate, reflect Morningstar DBRS' recoverability expectations for the remaining loans in the pool. While the recoverability analysis indicates that, even in a conservative scenario, losses would be contained to the Class C certificate, the transaction is exposed to increased adverse selection and propensity for interest shortfalls given only eight loans remain in the pool, and all are in special servicing. The remaining loan collateral consists primarily of office and retail properties, which represent 48.5% of the pool and 47.3% of the pool, respectively. The Morningstar DBRS loss expectations are primarily driven by the two largest remaining loans in the pool, Sugar Creek I & II (Prospectus ID#4, 31.9% of the pool) and Worldgate Centre (Prospectus ID#3, 29.1% of the pool), both of which received updated appraisals in March 2024, indicating significant value declines from issuance. With the November 2024 remittance, interest payments on the Class C certificate were shorted by approximately $1.1 million and are accumulating at a rate of approximately $190,000 per month. The Class B certificate continues to receive full interest due, but given the factors as described above, the servicer could elect to withhold those payments as the workout periods continue to extend for the remaining loans in the pool.

The largest remaining loan, Sugar Creek I & II, is secured by two adjacent Class A office buildings in Sugar Land, Texas, totaling 409,618 square feet (sf). The loan has been real estate owned since February 2023, and the lender has experienced continued issues in leasing up space with the March 2024 occupancy reported at 55.2%, which is in line with the prior two years. There is considerable rollover of 22.4% of the NRA in the coming 12 months, including the second-largest tenant, Noble Drilling Services (17.7% of the NRA, lease expiry in December 2024), which is expected to vacate. In addition, the property is located in the distressed southwest Houston submarket, which according to Reis reported a Q3 2024 vacancy of 25.9%. The property was appraised in March 2024 for $30.3 million, marking a third consecutive decline in appraised value since the issuance value of $83.5 million. As part of the recoverability analysis considered for this review, Morningstar DBRS liquidated this loan from the pool, applying a haircut to the March 2024 appraised value, which resulted in a loss severity in excess of 65%.

The second-largest remaining loan, Worldgate Centre, is secured by 229,326 sf anchored retail center in suburban Herndon, Virginia, in close proximity to Dulles International Airport. The loan most recently returned to the master servicer in February 2024 after the borrower requested a loan extension. As of the July 2024 reporting, a forbearance was approved extending the maturity date to July 2026 with an additional option for a one-year extension subject to performance criteria. As of the October 2024 remittance, loan payments remain current. In recent years, the loan's performance has deteriorated versus pre-pandemic figures, reporting a debt service coverage ratio of 0.64 times (x) as of YE2023 compared with 0.54x in YE2022 and 1.3x at issuance. The drop in performance is primarily attributable to the loss of income from the property's fitness center tenant, Sport & Health (approximately 45.0% of the NRA), which vacated after filing for Chapter 7 bankruptcy in 2021. Following the tenant's bankruptcy filing, the landlord reopened the fitness center with management assistance from Arch and worked to re-sign existing members. However, the prior tentant had neglected the space and, ultimately, it required nearly $3.0 million in capital improvements to bring it up to standard. Since the renovations, membership levels have increased each month, and the landlord intends to attract a new fitness center tenant that will enter into a long-term lease agreement and assume in-place membership/business responsibilities. Occupancy has remained quite stable with the September 2024 rent roll reporting an occupancy of 99.6%; however, the landlord continues to operate the fitness center and is not collecting rent, with an implied economic occupancy rate of just 54%. According to the most recent appraisal dated March 2024, the as-is value was reported at $37.1 million compared with $88.5 million at issuance. Morningstar DBRS applied a haircut to the March 2024 appraisal in the liquidation analysis considered for the loan as part of this review, resulting in a 45% loss severity.

CREDIT RATING RATIONALE/DESCRIPTION
Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 .

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 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 wind down, with eight loans remaining. In such cases, Morningstar DBRS credit ratings are typically based on a recoverability analysis.

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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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),
https://dbrs.morningstar.com/research/428797
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024),
https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024),
https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (October 28, 2024),
https://dbrs.morningstar.com/research/441840

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.