DBRS Confirms Ratings of GS Mortgage Securities Trust 2014-GC26

DBRS Limited (DBRS) has today confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2014-GC26 (the Certificates), issued by GS Mortgage Securities Trust 2014-GC26 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-C at AAA (sf)
-- Class X-D at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class PEZ at A (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

All trends are Stable. DBRS does not rate the first or second loss piece, Class G or Class H. Class PEZ certificates are exchangeable with the Class A-S, Class B and Class C certificates (and vice versa).

The rating confirmations reflect that the transaction’s current performance remains in line with expectations since issuance in December 2014. The collateral consists of 92-fixed rate loans secured by 133 commercial properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.44 times (x) and 8.3%, respectively. As of the November 2015 remittance, 78.5% of the pool reported 2015 cash flows (most being Q2 2015 figures), and for those loans, the annualized WA DSCR and WA debt yield were 1.53x and 9.2%, respectively. These figures are artificially suppressed as the third largest loan, 5599 San Felipe (Prospectus ID#3, 6.4% of the current pool balance), reported a Q2 2015 figure of 1.04x; however, this figure did not include the full amount of rental reimbursements, which if included, would total an annualized net cash flow of approximately $8.8 million. Factoring in these reimbursements, the loan would reflect a DSCR of approximately 1.86x. As of the November 2015 remittance, the pool had an aggregate balance of approximately $1.25 billion, representative of a collateral reduction of 0.5% since issuance as a result of scheduled loan amortization. The transaction benefits from a concentration of high-quality properties as DBRS considers five loans (three within the Top 10), representing 15.3% of the current pool balance, to be secured by properties with Above Average property quality. Additionally, the pool is concentrated by loans secured by properties located in urban and suburban markets, representing 21.0% and 46.6% of the pool, respectively. Eleven loans, representing 23.3% of the current pool balance, are associated with sponsors that have previously had management issues, declared bankruptcy, foreclosure proceedings or have limited net worth and/or liquidity. DBRS modeled these loans with an elevated probability of default to mitigate this risk. DBRS has highlighted one loan below that is not currently on the servicer’s watchlist, but has recently experienced a decline in performance.

The Fountains Center loan (Prospectus ID#8, 2.0% of the current pool balance) is secured by the fee interest in a 184,363 square foot (sf) mixed-use property located in Boca, Florida. The seven buildings range, from single to four stories, and were constructed in phases between 1978 and 1988. The property was acquired in 2012 at a price of $16.0 million from Capmark Bank. At the time, the subject was in foreclosure and was only 45% occupied. Since acquisition, the borrower has invested approximately $4.6 million in interior and exterior renovations, as well as an additional $5.0 million in tenant improvements. As of Q2 2015, the loan had an annualized DSCR of 1.11x due to a 6.2% decline in rental revenue and an 18.8% increase in total operating expenses. According to the Q2 2015 OSAR, the increases in expenses were primarily a result of increased Payroll & Benefits ($375,000), Janitorial ($160,000) and Utilities ($52,000) costs. As of September 2015, the property was 82.0% occupied with an average rental rate of $28.02 per square foot (psf) gross, compared to 82.9% occupied with an average rental rate of $28.64 psf gross in October 2014. According to CoStar, as of Q3 2015, Class B office buildings between 10,000 sf to 60,000 sf within the Boca Raton West submarket, reported average occupancy, availability and gross rental rates of 84.2%, 20.5% and $26.62 psf gross, respectively. The two largest tenants include CYC Insurance Services (7.0% of the net rentable area (NRA)) and John Hancock Life Insurance (6.7% of the NRA), with lease expiration dates in April 2020 and September 2023, respectively. The third largest tenant, Acts Retirement Life Company (3.0% NRA) had a lease expiration as of March 2015, however, according to Costar, the tenant is still current. DBRS has requested a leasing update. According to the August 2015 site inspection, the property was found to be in Average condition. At the time, one unit (3.5% of the NRA) was under renovation in preparation for a new tenant buildout.

As of November 2015 remittance, there are no loans in special servicing and four loans on the servicer’s watchlist, representing 1.5% of the current pool balance. Three of these loans, the Ventura Collection (Prospectus ID#60, 0.5% of the current pool balance), Amsdell – Rockwall, TX (Prospectus ID#61, 0.5% of the current pool balance) and 2025 Wilshire (Prospectus ID#77, 0.3% of the current pool balance) were flagged for various reasons, but none are expected to have major impacts on financial performance.

The fourth loan on the watchlist, 757 East Tremont Avenue (Prospectus ID#88, 0.2% of the current pool balance), is secured by the fee interest in a three-storey, 10,000 sf mixed-use building located in the Bronx, New York. As of September 2014, the property was 100% leased to five commercial tenants (first and second floor) and two, six-bedroom residential units (third floor). The loan was placed on the servicer’s watchlist in August 2015 because of a decline in financial performance. As of Q3 2015, the loan had an annualized DSCR of 0.54x compared with the DBRS UW DSCR of 1.23x. According to the June 2015 rent roll, the property remains 100% occupied, however, the average base rental rate has dropped to $18.91 psf, compared with $35.72 psf in September 2014. It appears the borrower has converted the two commercial units on the second floor into residential units, as well as reallocating space between the three tenants on the first floor; both attributing to a significantly lower rental rate. In addition to the decline in rental revenue, the servicer reports that the borrower had offered rental abatements, and that the property had temporary periods of increased vacancy throughout 2015. The servicer notes that negotiations are underway regarding rates for the residential units. DBRS modeled this loan with an elevated probability of default to mitigate the decline in rental revenue and the moderate increase in expenses.

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 loans on the servicer’s watchlist. 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.