DBRS Upgrades Two Classes of GE Commercial Mortgage Corporation, Series 2004-C2

DBRS Limited (DBRS) has today upgraded two classes of GE Commercial Mortgage Corporation, Series 2004-C2 as follows:

-- Class M to A (high) (sf) from A (low) (sf)
-- Class N to BB (high) (sf) from BB (sf)

In addition, DBRS has confirmed the remaining classes in the transaction as follows:

-- Class X-1 at AAA (sf)
-- Class O at B (sf)

All trends are stable. In addition, Class L has been discontinued as the class has been repaid in full with the October 2016 remittance.

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 98.0% with four of the original 119 loans outstanding as of the October 2016 remittance report. With the October remittance, the Brentmoor Place loan was liquidated from the trust with a realized loss of approximately $650,000. The loan was formerly secured by an independent living property in St. Louis, Missouri. The actual realized loss was contained to the unrated Class P and was less than the DBRS-modeled loss as the asset was sold for more than the most recent appraised value completed in January 2016. One loan, Continental Center, representing 83.7% of the pool, is on the servicer’s watchlist, and one loan, Bayshore Plaza, representing 10.6% of the pool, is in special servicing. The two remaining loans, representing 5.7% of the pool, are fully defeased and are scheduled to mature in February 2019.

The largest loan in the pool, Continental Center, remains on the watchlist for monitoring as it was modified in June 2014 after numerous years of weak performance; however, performance has improved significantly since. The loan is secured by a 26-story, 477,259 square foot (sf) Class B office property located in downtown Columbus, Ohio, constructed in 1972 and most recently renovated in 2002. The loan transferred to special servicing in December 2012 for imminent default because of cash flow issues and returned to the master servicer in September 2014 after the loan was modified. Terms of the modification included bifurcating the note into an interest-only (IO) $17.5 million A-note and an IO $5.6 million B-note, along with a five-year maturity extension to March 2019. In addition, the A-note was modified with a decrease in the interest rate, which increases over time to the original rate of 5.75%. The interest accrues on both the B-note and the rate differential associated with the A-note. 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.

Since the loan was modified, loan performance has improved considerably with an annualized Q2 2016 debt service coverage ratio (DSCR) of 3.62 times (x) and a YE2015 DSCR of 3.58x. As of the June 2016 rent roll, the property was 79.0% occupied with an average rental rate of $13.21 per square foot (psf), remaining in line with May 2015 occupancy of 80.8% and an average rental rate of $12.95 psf. Occupancy and rental rates remain below market as CoStar reports a vacancy rate of 7.4% and an average rental rate of $18.44 psf for offices in the Downtown Columbus submarket. The largest tenants at the property include: SBC Ameritech/AT&T (33.6% of net rentable area (NRA); lease expires on December 31, 2017), the State of Ohio (28.8% of NRA; lease expires on June 30, 2017) and Miami Jacobs Career Centre (9.1% of NRA; lease expires on September 30, 2018). There is significant upcoming tenant rollover risk as 62.5% and 10.0% of the NRA is scheduled to expire in 2017 and 2018, respectively. The loan currently has a hard lockbox in place to capture excess cash and there is a current tenant improvement/leasing commission reserve of $1.6 million. DBRS will continue to monitor the rollover risk.

The Bayshore Plaza loan was transferred to special servicing in December 2012 for imminent default and the property is currently real estate owned. This loan is secured by a 27,702 sf retail strip center in Gilbert, Arizona, about 22 miles southeast of Phoenix. Currently, the strategy remains to lease up the vacant space and renew existing tenants. According to the annualized Q2 2016 Operating Statement Analysis Report, the DSCR was 0.71x, an increase from 0.14x at YE2015. As of the August 2016 rent roll, the property was 66.4% occupied; however, the servicer states that the property has since signed two new tenants, which would increase occupancy to 88.4% with an average rental rate of $15.27 psf. Property metrics remain below market as CoStar reports a vacancy rate of 7.2% and an average rental rate of $17.49 psf for retail properties in the Gilbert submarket. An August 2016 appraisal valued the collateral at $4.1 million ($148.00 psf), an increase over the October 2015 appraised value of $3.9 million ($140.78 psf), but still below the issuance appraised value of $5.25 million ($189.52 psf). According to the most recent appraisal, comparable sales in the Gilbert and Chandler areas ranged from $137.93 psf to $275.63 psf in the last two years. DBRS expects that the trust will incur a loss with the liquidation of the asset.

The ratings assigned to the Classes M, N, and O Certificates materially deviate from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the rating reflects the uncertain loan level event risk.

For more information on this transaction and supporting data, please log into DBRS CMBS IReports, www.ireports.dbrs.com. DBRS continues to monitor this transaction monthly with periodic updates provided in the DBRS CMBS IReports platform.

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.

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.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.