DBRS Downgrades Two Classes of GS Mortgage Securities Trust, Series 2012-GCJ7

DBRS Limited (DBRS) downgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2012-GCJ7 (the Certificates) issued by GS Mortgage Securities Trust, Series 2012-GCJ7:

-- Class F to B (low) (sf) from B (sf)
-- Class X-B to B (sf) from B (high) (sf)

DBRS has also confirmed the remaining Certificates as follows:
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)

All trends are Stable, with the exception of Class F and X-B, which carry a Negative trend, assigned by DBRS to reflect the uncertainty of the ultimate resolution for the two loans currently in special servicing, Prospectus ID#14, 545 Long Wharf Drive (2.3% of the pool) and Prospectus ID#24, Fifth Third Center (1.3% of the current pool).

The rating downgrades and Negative trend assignments to select classes reflect DBRS’s increased expectation of losses to the trust for the two loans in special servicing, which collectively represent 3.7% of the outstanding pool balance; the two loans transferred to the special servicer in May and June 2017. Based on recent appraisals obtained by the special servicer for each collateral property, both show significant value declines since issuance.

The June 2017 appraisal for the property securing the larger loan in special servicing, 545 Long Wharf Drive, estimated the current as-is value of the property at $9.7 million, 78.9% below the issuance value of $46.0 million. The May 2017 appraisal for the collateral for the smaller loan, Fifth Third Center, estimated the current as-is value of the property at $6.35 million, 78.5% below the issuance value of $29.5 million. Both appraisals provided a stabilized value for each property, but those values also suggest significant declines in value from issuance for the two collateral properties, both of which are office buildings situated in secondary markets in New Haven, Connecticut, and Dayton, Ohio. It is also noteworthy that for the 545 Long Wharf Drive loan, an upfront tenant improvement/leasing commission contribution of $1.5 million, supplemented with ongoing collections since issuance and a cash flow sweep initiated in November 2016 has resulted in a rollover reserve balance of $4.9 million and a cash sweep reserve balance of $1.0 million as of the August 2017 remittance. These funds could be used for lease-up or applied to principal in the event of a liquidation, providing some cushion against the final loss amount as long as servicer advances are well managed.

There has been a loss to the trust within the last six months with the liquidation of Prospectus ID#16, Independence Place, in April 2017 at a realized loss of $8.5 million. Based on the conservative liquidation scenarios analyzed for the two loans currently in special servicing, DBRS expects losses to be contained to the unrated Class G, which had a remaining balance of $40.3 million as of the August 2017 remittance. However, as the balance of that class would be reduced significantly, credit support to the Class F tranche would be reduced significantly, supporting the one notch downgrade and Negative trend assignment for that Class with this review.

The transaction does benefit from generally stable performance for the non-specially serviced loans within the pool, as well as the collateral reduction of 25.8% since issuance as the result of scheduled amortization and loan repayments. In addition, there are six loans, representing 7.5% of the pool balance, that are fully defeased. At issuance the pool consisted of 79 fixed-rate loans, and as of the September 2017 remittance report, 64 loans remain in the pool with an aggregate outstanding principal balance of $1.20 billion. The top 15 loans have generally performed well since issuance, with a weighted-average (WA) debt service coverage ratio of 1.71 times and a WA net cash flow growth over the respective DBRS issuance figures of 20.5%, based on the most recent year-end reporting available for the non-defeased loans. There are four remaining loans, representing 8.6% of the pool, with full interest-only terms.

As of the September 2017 remittance, 12 loans, representing 16.8% of the pool, were on the servicer’s watchlist. The two largest loans on the watchlist are being monitored for tenancy issues and, in both cases, there have been positive developments to mitigate the risks associated with those issues. The remaining ten loans individually represent a small percentage of the overall pool balance. As applicable, DBRS assumed a stressed scenario in its analysis for those loans with this review.

With this review, DBRS has provided updated loan-level commentary and analysis for the pivotal loans in the transaction in the DBRS commercial mortgage-backed securities (CMBS) IReports platform. Registration is free. The commentary for the top 15 and larger watchlist loans was updated in the IReports platform with the last DBRS surveillance review of this transaction conducted in February 2017. To view these and future loan-level updates provided as part of DBRS’s ongoing surveillance for this transaction, please register or log into DBRS CMBS IReports at www.ireports.dbrs.com.

The ratings assigned to Classes C and D materially deviate from the higher ratings implied by the quantitative results and the ratings assigned to Class F materially deviate from the lower ratings implied by the quantitative results. 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 results that is a substantial component of a rating methodology. The deviations are warranted due to sustainability of loan trends has not yet been demonstrated.

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 principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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