DBRS Confirms All Classes of GS Mortgage Securities Trust, Series 2012-GCJ7

DBRS, Inc. (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2012-GCJ7, issued by GS Mortgage Securities Trust, 2012-GCJ7:

-- 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 A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)

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

The rating confirmations reflect the overall stable performance of the pool since issuance, with all 79 of the original loans remaining in the pool as of the March 2016 remittance and collateral reduction since issuance of 5.0%. There are ten defeased loans in the pool, representing 8.5% of the transaction balance. Performance metrics are healthy, with a weighted-average in-place debt service coverage ratio (DSCR) of 1.60x and a weighted-average debt yield of 12.0%. Those figures compare with the issuance levels of 1.50x and 10.7%, respectively. In addition, the DBRS weighted-average term and refinance DSCR figures are considered healthy, at 1.51x and 1.39x, respectively.

As of the March 2016 remittance, there are 13 loans on the servicer’s watchlist, representing 19.4% of the pool balance, and one loan in special servicing, representing 1.6% of the pool. The majority of the loans on the watchlist are being monitored for relatively minor deferred maintenance items, with some monitored for cash flow declines. The loan in special servicing was transferred in October 2014 and is now real estate owned (REO).

There are four loans scheduled to mature in the next 12 months, representing 5.7% of the pool. One of those loans is defeased, representing 1.4% of the pool. For the three non defeased loans, the weighted-average DBRS refinance DSCR is healthy, at 1.65x, with all three properties performing as expected since issuance. Two of the loans are scheduled to mature in August 2016 and the third will mature in November 2016. DBRS does not anticipate any of the loans will have difficulty securing replacement financing, but will monitor for developments through maturity.

There are two shopping malls in the Top 15, Prospectus ID #3, Bellis Fair Mall (5.7% of the pool) and Prospectus ID #6, The Outlet Shoppes at Oklahoma City (3.6% of the pool). Although both are exhibiting healthy cash flow growth over the respective DBRS underwritten figures, there is some concern in the declining sales trends for each, particularly with Bellis Fair Mall.

Bellis Fair Mall is an enclosed mall owned and operated by General Growth Properties (GGP), located in Bellingham, Washington, approximately 20 miles south of the Canadian border. The mall is anchored by collateral tenants Macy’s and Sports Authority (not on the closing list) and non-collateral anchors are Target, Kohl’s and JC Penney. The trailing twelve month (TTM) December 2015 tenant sales report shows tenants occupying less than 10,000 sf averaged sales of $305 psf, down from $349 psf for the prior year and $442 psf at issuance. The only anchor reporting sales is Macy’s, who reported sales of $239 psf, down from $272 psf in 2014 and $271 psf at issuance. The occupancy is relatively stable from issuance, with the Q3 2015 rent roll showing the collateral portion of the mall is 97.7% occupied, with the annualized NCF figure showing growth of +46.3% over the DBRS UW figure. Some of the cash flow growth can be attributed to a decline in reported expenses for the property, which may be reported artificially low, particularly with regard to management fees paid to an affiliate of GGP. DBRS has requested information from the servicer on the sales decline at the property and the response is pending as of the date of this press release. Given the property’s proximity to the Canadian border, DBRS noted at issuance that the property benefited from cross-border shoppers coming to take advantage of lower pricing in the United States, but as the value of the Canadian currency has declined in recent years, that traffic has likely slowed.

The Outlet Shoppes at Oklahoma City is an outlet mall located in Oklahoma City, Oklahoma, in the western portion of the city approximately seven miles from the CBD. The property was constructed in 2011 and the largest tenants are Nike Factory Outlet, Hanes Brands and Polo Ralph Lauren. Tenant departures over the past few years include the former largest tenant, Saks Off Fifth, which vacated in 2014 and has since been replaced with Express Outlet, Torrid and Charlotte Russe. Other notable departures include White House Black Market, BCBG Max Azria and DKNY. As of the December 2015 rent roll, the property was 96.8% occupied, with approximately 30.0% of the NRA scheduled to roll in 2016, as many of the original leases signed in 2011 were for five-year terms. The December 2015 tenant sales report shows overall sales are down by -2.0% from the prior year; DBRS expects these trends are a combination of events, with the move-ins and move-outs in recent years disrupting the occupancy rates for periods of time and the general decline in the local economy related to the drop in energy prices. The owner/operator is Horizon Group Properties, L.P., who cosponsored the loan with CBL & Associates Properties, Inc.

The largest loan on the servicer’s watchlist being monitored for cash flow declines from issuance is Prospectus ID #9, 110 Plaza San Diego (3.3% of the pool). The loan is on the watchlist for the Q3 2015 DSCR of 0.74x and occupancy rate of 33.9%. The occupancy rate has fallen precipitously over the past few years, down from 85.4% at issuance to 79.6% at YE2012, 76.7% at YE2013 and 71.2% at YE2014. The sharp drop from YE2014 reflects the loss of the Department of Justice (DOJ) at lease expiry in October 2015, which had been at the property since 1992 and occupied 37.1% of the NRA. The DOJ moved to a Class A property, One America Plaza (600 West Broadway), a prominent building in downtown San Diego. CoStar reports an average availability rate of 42.0% for Class B properties of similar vintage in downtown San Diego, with a five-year average availability rate of 28.7%. The servicer has advised that the borrower is in negotiations with two tenants for approximately 50.0% of the NRA at the property, but notes that nothing has been signed to date. The loan is cosponsored by an entity owned by Michael Eisner and the borrower retained $29.0 million in cash equity at closing for the subject loan, which financed the acquisition of the property in 2012.

The loan in special servicing, Prospectus ID #16, Independence Place (1.6% of the pool), is secured by a 264-unit multifamily property located in Hinesville, Georgia, approximately 40 miles southwest of Savannah. Fort Stewart, the largest Army instillation east of the Mississippi, is located in Hinesville and the property’s tenancy at issuance was approximately 70% military. In 2013, deployments, which gave tenants the right to terminate their lease, caused occupancy declines at the property to 72%, down from 83% at issuance. The loan transferred to the special servicer in October 2014 and has since become REO. The most recent cash flow figures reported by the special servicer show a DSCR of 0.64x and an occupancy rate of 80.0% as of Q2 2015. The initial value obtained by the special servicer in December 2014 showed a value of $23.8 million; however, an October 2015 value indicates a decline to $21.1 million and the special servicer notes that the value is based on a stabilized occupancy rate of 85%, higher than the occupancy rate actually achieved by the property in the last 24 months. Given the trust’s exposure inclusive of outstanding advances and the decline from the previous value and the servicer’s commentary regarding the most recent figure, DBRS expects the loss severity on this loan could be in excess of 40.0%.

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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.