DBRS Confirms Ratings of Citigroup Commercial Mortgage Trust 2014-GC19, Stable Trends

DBRS Limited (DBRS) has today confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2014-GC19 issued by Citigroup Commercial Mortgage Trust 2014-GC19 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-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 (high) (sf)
-- Class PEZ at AA (low) (sf)
-- Class C at AA (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class G.

The rating confirmations reflect the current performance of the pool, which is stable from issuance, with cash flows remaining generally in line with the DBRS underwritten (UW) levels. The collateral consists of 72 fixed-rate loans secured by 128 commercial properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.43 times (x) and 8.9%, respectively. As of the February 2016 remittance, 51 loans (75.5% of the pool) reported Q3 2015 cash flows, while 26 loans (22.8% of the pool) reported YE2015 cash flows. DBRS is still waiting on updated financials for the 335 West 16th Street loan (Prospectus ID#8, 2.8% of the pool). For the 14 loans reporting 2015 cash flows in the Top 15, the WA amortizing DSCR was 1.67x, with a WA net cash flow (NCF) growth over the respective DBRS UW figures of approximately 14.6%. All 78 loans remain in the pool with an aggregate balance of $1.0 billion, representing a collateral reduction of approximately 1.5% since issuance as a result of scheduled loan amortization.

There is one loan in the Top 15, Mid-City Plaza (Prospectus ID#13, 1.8% of the pool), exhibiting a YE2015 NCF indicative of a 12.7% cash flow decline when compared with the DBRS UW figure. The loan is secured by a 218,144 square foot (sf) anchored retail center located in North Tonawanda, New York, approximately ten miles north of Buffalo and 11 miles southeast of Niagara Falls. The property consists of seven one-story buildings with the improvements originally constructed in 1958 and additional buildings completed in 2004. As of Q3 2015, the loan had an annualized DSCR of 1.55x compared with the DBRS UW figure of 1.61x; however, the partial 2015 figure did not include the full amount of rental reimbursements, which, if included, would total an annualized NCF of approximately $2.3 million. Factoring in these reimbursements, the loan would reflect a DSCR of approximately 1.95x. It should be noted that total operating expenses also exhibited a 20.1% decline compared with the DBRS UW figures, primarily because of a decline in real estate taxes (19.3%) and insurance (99.5%) expense, which generally have minor variances year to year. As of YE2015, the loan reported a DSCR that had further eroded to 1.41x. DBRS has contacted the servicer regarding an updated breakdown of the expenses reimbursements, as well as the operating expense line items.

As of September 2015, the property was 93.3% occupied with an average triple net (NNN) rental rate of $12.18 psf NNN compared with 94.5% with an average rental rate of $12.10 psf NNN at issuance. According to CoStar, as of YE2015, the North Retail submarket of Buffalo reported a vacancy rate of 5.5% with an average rental rate of $10.94 psf NNN. The three largest tenants include Top Markets (26% of the net rentable area (NRA)), Grossman’s Bargain Outlet (11.4% of the NRA) and Dollar Tree (4.4% of the NRA), with lease expiration dates of July 2024, March 2019 and January 2021, respectively. Rollover in the next 24 months is minimal, as only two tenants, representing 5.7% of the pool, have lease expirations.

As of the February 2016 remittance, there are no loans in special servicing and seven loans, representing 6.1% of the pool, on the servicer’s watchlist. Four of these loans, representing 3.7% of the pool, were flagged because of items of deferred maintenance, while the remaining three loans, representing 2.4% of the pool, were flagged for performance-related reasons. According to the 2015 cash flows reported (both Q3 2015 and YE2015 figures), these loans had a WA DSCR and WA debt yield of 0.90x and 6.3%, respectively, compared with the DBRS UW figures of 0.90x and 8.2%, respectively. DBRS has highlighted one of these loans in detail below.

The 334-336 West Street 46th Street loan (Prospectus ID#35, 0.9% of the pool) is secured by an 11,600-sf mixed-used building, originally constructed between 1900 and 1920, with renovations most recently completed in 2005 and 2014. The subject is located in Manhattan, New York, and comprises one ground floor retail unit (34.5% of the NRA) leased to Kosher Restaurant, two two-bedroom units (24.3% of the NRA) and eight one-bedroom units (41.2% of the NRA). The borrower acquired the property in late 2013 for $11.25 million, investing approximately $3.5 million of cash equity.

The loan was placed on the servicer’s watchlist in February 2014 as a result of a low YE2014 DSCR of 0.70x compared with the DBRS UW figure of 1.15x. At the time, the decline in performance was a result of a rental abatement for the restaurant tenant. In January 2014, the Kosher Restaurant signed a 15-year lease with a fixed 3.0% annual rental rate increase and received an initial six-month rental abatement period, which was used to build out the tenant’s space, as it was delivered as-is with no tenant improvement allowance. According to CoStar, as of YE2015, the Midtown Retail submarket reported a vacancy rate of 5.5% with an average rental rate of $100.67 psf compared with the current tenant’s rental rate of $115.87 psf. As of YE2015, performance increased moderately with a DSCR of 0.85x. This figure is representative of a 43.0% decline in estimated gross income when compared with the DBRS UW figures, as a result of increased vacancy and declining rental rates of the ten apartment units throughout 2015. It appears that three of the apartment units were vacant for at least six months of the year; however, according to the December 2015 rent roll, all units are currently occupied. As of December 2015, the one-bedroom units had an average rental rate of $2,925 per unit compared with $3,400 at issuance, while the two-bedroom units had an average rental rate of $4,900 compared with $6,000 at issuance. According to REIS, as of YE2015, the Midtown West submarket reported that one-bedroom units had an average rental rate of $4,314, while two-bedroom units had an average rental rate of $6,220, both well above the subject property’s rates.

The sponsors of the loan are brothers Salim and Isaac Assa, who are the key principals of Assa Properties, a full-service real estate development, acquisition and management firm based in New York, New York, with over 3.0 million sf of assets located throughout the United States and Mexico. According to an article dated February 15, 2015, by “Crain's New York Business,” the City of New York has sued Mr. Assa for running an “illegal hotel operation” at the subject property and two other residential buildings he owns in the area. These operations have reportedly resulted in approximately $100,000 in outstanding fines for 36 unpaid violations, 16 of which were attributed to the subject property. At issuance for the COMM 2013-CCRE6 transaction, which also contains a loan cosponsored by the Assa brothers (Prospectus ID #14, 70 West 45th Street), DBRS noted previous legal issues for the sponsors that included a voluntary Chapter 11 bankruptcy for the entity that previously owned the property. For additional information on the CCRE6 property sponsored by the Assa brothers, please refer to the press release for that transaction dated January 16, 2016. To capture the additional risk associated with the sponsors’ legal issues, DBRS elevates the probability for default for both the subject loan and the CCRE6 loan in the modeling for each respective transaction.

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

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 (December 2015), which can be found on our website under Methodologies.

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