DBRS Upgrades Four Classes and Confirms One of GE Commercial Mortgage Corporation, Series 2004-C2

DBRS Limited (DBRS) has today upgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2004-C2 (the Certificates) issued by GECMC 2004-C2.

-- Class L upgraded to A (high) (sf) from A (low) (sf)
-- Class M upgraded to A (low) (sf) from BB (sf)
-- Class N upgraded to BB (sf) from CCC (sf)
-- Class O upgraded to B (sf) from CCC (sf)

DBRS has also confirmed the rating on the following class:

-- Class X-1 at AAA (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of loan amortization and successful loan repayment. Since issuance, the pool has experienced collateral reduction of 97.6%, with five of the original 119 loans outstanding as of the November 2015 remittance report. In the last 12 months, one loan has been fully repaid from the trust, and two loans were liquidated from the trust with a combined realized loss of $216,156 contained to the unrated Class P. Three loans are scheduled to mature in 2019, two of which are fully defeased, representing 6.5% of the current pool balance. As of the November 2015 remittance, there are two loans in special servicing, representing 22.5% of the current pool balance. Both are non-performing matured balloon loans that show updated appraised values, indicating a weighted-average property value decline of 29.7% since issuance. The largest loan, Continental Center, representing 71.0% of the current pool balance, was previously in special servicing and was modified with a hope note in June 2014. Although the loan has since been returned to the master servicer and continues to perform per the terms of the modification, the loan will be subject to a special servicing fee upon disposition from the trust. This event, coupled with the current interest shortfalls within the capital stack, could potentially cause interest to be shorted from multiple classes in the bond stack. The largest loan in the pool and the two loans in special servicing are highlighted below.

Continental Center (Prospectus ID#8, 71.0% of the current pool balance) is secured by a 26-story, class B office property in downtown Columbus, Ohio. The loan was transferred to the special servicer in December 2012 for imminent default and was returned to the master servicer in September 2014. The loan underwent a modification in June 2014, resulting in the creation of an interest-only $17.5 million A-note and a $5.6 million B-note, along with a five-year maturity extension to March 2019. The A-note was modified with a decrease in the interest rate, which increases over time to the original rate of 5.75%. Interest accrues on both the B-note and the A-note. The property occupancy has hovered at approximately 80.0% for the past year, according to the May 2015 rent roll. As of November 2015, CoStar is reporting average vacancy rates that are below the subject at 7.6% for the Columbus submarket. The largest two tenants account for 65.9% of the net rentable area (NRA), with the State of Ohio-AG tenant (32.4% of NRA) exercising its sixth renewal option and extending its lease to June 2017 from its initial lease expiration in June 2015. Since the loan modification, the performance of the loan has markedly improved, with a YE2014 debt service coverage ratio (DSCR) of 2.32 times (x) and a Q2 2015 DSCR of 2.36x on the A-note debt service compared with the YE2013 DSCR of 0.74x. Although the subject’s May 2013 appraisal value of $14.2 million is below the modified A-note of $17.5 million, the market value of the asset has likely improved following the loan modification and the subsequent improvement in cash flow. DBRS has modeled the B-note and the accrued interest on the B-note and A-note as a loss.

Brentmoor Place (Prospectus ID#78, 13.3% of the current pool balance) is secured by a 72-unit independent living center in St. Louis, Missouri. The loan transferred to special servicing in January 2013 for imminent default, and the property has remained real estate owned (REO) since August 2013. The servicer has noted that as of November 2015, a potential sale of the asset has not materialized and that the property manager is currently re-evaluating possible workout strategies. The property occupancy has improved to 79.2% as of September 2015 compared with 69.4% at September 2014 as a result of the property management’s marketing efforts to renew existing tenants and lease available units. As of November 2015, management has engaged in a new marketing strategy to target potential local tenants through magazine advertisements as well as creating a stronger online presence in an effort to gain leasing momentum. The December 2014 site inspection shows the property to be in average condition, with deferred maintenance limited to asphalt deterioration, cracks in the foundation and peeling paint. Although the Q1 2015 DSCR of 1.03x has improved compared with the YE2014 DSCR of 0.44x, cash flow is likely to remain low until leasing activity has improved as a result of the property managers renewed marketing efforts. A January 2015 appraisal valued the property at $5.2 million, which has remained unchanged from the January 2014 appraisal. However, the value has declined by $2.5 million compared with the issuance value of $7.7 million, implying a loan-to-value of 83.2%. This value remains below the outstanding loan balance and all advances outstanding, which total approximately $5.4 million as of November 2015. DBRS expects the trust will incur a loss with the liquidation of the asset.

Bayshore Plaza (Prospectus ID#89, 9.3% of the current pool balance) is secured by a 27,702-square foot retail strip center in Gilbert, Arizona. The loan transferred to special servicing in December 2012 for imminent default, and the property is currently REO. The property occupancy has remained depressed at 64.0% as of November 2015, with a correspondingly low DSCR that was -0.09x as of Q2 2015, according to the most recent reporting available. Reis reports an average vacancy rate of 14.9% at Q3 2015 for unanchored retail centers in the subject’s submarket. The largest three tenants account for 24.5% of the NRA, with the earliest lease scheduled to expire in April 2017. As of November 2015, the current strategy is to market the vacant space at the subject. The servicer has noted that a triple-net lease has been proposed for a restaurant tenant accounting for 4.7% of the NRA and paying $18.00 per square foot (psf). Despite the cash flow issues at the property, the subject is in average condition with minor deferred maintenance issues limited to parking lot deterioration. An October 2015 appraisal indicates a value of $3.9 million ($141 psf) for the property, an increase from the $3.1 million value from the December 2013 appraisal, but still a decline from the issuance value of $5.25 million. DBRS also expects the trust will incur a loss with the liquidation of the asset.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction, including details on the largest loans in the pool and specially serviced loans. The November 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.