Morningstar DBRS Downgrades Credit Ratings on Six Classes of Wells Fargo Commercial Mortgage Trust 2014-LC18

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2014-LC18 issued by Wells Fargo Commercial Mortgage Trust 2014-LC18 as follows:

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

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

-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PEX at A (sf)

Morningstar DBRS maintained the Negative trends on Classes D and X-B. The trends on Classes B, C, and PEX remain Stable. There are no trends on Classes E, F, X-E, and X-F, which have credit ratings that do not generally carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades reflect an increase in Morningstar DBRS' loss expectations, as a result of the concentrated nature of the pool as it enters wind-down. Since the last credit rating action, 67 loans have repaid and one loan was liquidated with no loss to the trust, representing a collateral reduction of 81.4% of the pool. As of the January 2025 remittance, only 11 loans remain in the pool; nine of which (86.7% of the pool balance) are in special servicing, and the remaining loans are being monitored on the servicer's watchlist for upcoming maturity. Given the adverse selection and high concentration of defaulted assets, Morningstar DBRS considered liquidation scenarios for all specially serviced loans to determine recoverability for the remaining classes.

While the three largest loans, 2900 Fairview Park Drive (Prospectus ID#4, 16.8% of the pool), Colorado Mills (Prospectus ID#6, 14.8% of the pool), and One Towne Square (Prospectus ID#7, 14.1% of the pool) remain current with workout strategies yet to be finalized, Morningstar DBRS notes that the risk of payment default remains high. This would extend the recoverability timeline for the outstanding bonds and increase propensity for interest shortfalls. This consideration was a primary factor in Morningstar DBRS' decision to maintain Negative trends on Classes D and X-B, along with the potential for further value deterioration as updated appraisals on are received. However, as loan workouts resolve and Morningstar DBRS' loss projections stabilize, the Negative trends may be revised to Stable based on Morningstar DBRS' updated expectations of recovery of the junior bonds.

The primary contributor to Morningstar DBRS' loss expectations is One Towne Square. The loan is secured by a 426,970-square-foot (sf) office property in Southfield, Michigan, approximately 17 miles northwest of Detroit. The loan transferred to the special servicer in October 2024 for anticipated maturity default ahead of the scheduled maturity in December 2024. As per the January 2025 remittance, the loan was last paid through in November 2024 and the workout strategy is yet to be determined. According to the October 2024 rent roll, occupancy at the property was reported at 84.6%, as compared with 77.9% at YE2023 and 89.9% at issuance. Debt service coverage ratio (DSCR) was reported at 1.35 times (x) for the trailing nine-month period ended September 30, 2024, which remains in line with the YE2023 figure. Over the next 12 months, leases totaling 16.5% of net rentable area (NRA) are scheduled to roll over. According to a Reis, Inc. report, office properties in the North Southfield submarket reported an average vacancy rate of 25.6% in Q3 2024, indicating the borrower may face challenges in back-filling any upcoming rollover. Morningstar DBRS recently reviewed the Maccabees Center, securitized in the GSMS 2014-GC22 transaction, which is collateralized by a suburban office building in Southfield, Michigan. The property was appraised approximately 70% below issuance in January 2025, driven by the low in-place occupancy rate and weak submarket fundamentals. Though the subject property continues to benefit from a relatively healthy occupancy rate and DSCR, the soft submarket conditions coupled with rollover risk are likely to contribute to value deterioration similar to the Maccabees Center property. In its analysis, Morningstar DBRS considered a liquidation scenario based on a stressed haircut to the issuance appraised value, resulting in a loss severity of approaching 50%.

Colorado Mills is secured by a 918,448-sf portion of 1.1 million-sf regional outlet mall in Lakewood, Colorado, and is sponsored by Simon Property Group, Inc. (Simon). The subject loan has a pari passu piece secured in the Wells Fargo Commercial Mortgage Securities, Inc. 2014-C25 transaction, which is also rated by Morningstar DBRS. The loan transferred to the special servicer in August 2024 for imminent monetary default and subsequently failed to repay at maturity in November 2024. As per the January 2025 remittance, the special servicer is reviewing loan modification proposals from the borrower while dual-tracking lender remedies. The occupancy rate has declined since issuance, most recently reported at 87.5% in September 2024. Despite the declines in occupancy, net cash flow remains in line with expectations at issuance. The property is anchored by a Regal UA Movie Theatre (9.0% of the NRA, lease expiry in December 2032) and Burlington (6.9% of the NRA, lease expiry in January 2031), and there is significant rollover risk of 27.4% of NRA over the next 12 months. Although there is no finalized workout strategy yet, Morningstar DBRS expects Simon will attempt to negotiate a maturity extension. Given the gradual occupancy decline since issuance, which is likely to exacerbate with the significant rollover risk, and general uncertainty surrounding the borrower's plans, Morningstar DBRS analyzed this loan with a liquidation scenario based on a conservative haircut to the issuance appraised value, resulting in a loss severity of approximately 20%.

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/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).

Classes X-B, X-E, and X-F 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 (December 13, 2024; https://dbrs.morningstar.com/research/444617).

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 info-DBRS@morningstar.com.

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 only 11 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 Limited
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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 (December 13, 2024; https://dbrs.morningstar.com/research/444616)
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702)
-- Legal Criteria for U.S. Structured Finance (December 3, 2024;
https://dbrs.morningstar.com/research/444064)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024; https://dbrs.morningstar.com/research/438283)

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.