DBRS Downgrades, Changes Trends on Two Classes of GE Commercial Mortgage Corporation, Series 2007-C1

DBRS, Inc. (DBRS) downgraded the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2007-C1 issued by GE Commercial Mortgage Corporation, Series 2007-C1 as follows:

-- Class A-M to BB (low) (sf) from BB (sf)
-- Class A-MFX to BB (low) (sf) from BB (sf)

Additionally, the trends on both classes have been changed to Negative from Stable.

The rating downgrades and trend changes reflect the increased risk and uncertainty to the remaining collateral in the transaction as only 13 of the original 197 loans remain in the transaction, with 11 loans, representing 58.2% of the current pool balance, in special servicing and the largest loan, representing 28.8% of the current pool balance, on the servicer’s watchlist. Since issuance, there has been collateral reduction of 78.9% as result of successful loan repayments, scheduled amortization, realized losses from liquidated loans and proceeds recovered from liquidated loans. The transaction is concentrated as the largest four loans represent 88.3% of the current pool balance. This concentration is problematic for the transaction as a whole, as the three largest loans, representing 75.3% of the current pool balance, each exhibit material performance issues. The largest two loans in the pool are summarized below.

The largest loan in the transaction, 666 Fifth Avenue, is secured by a Class B 1.4 million square foot (sf) office tower in Manhattan, New York. The property has been on the servicer’s watchlist since it was modified in December 2011, with modification terms including a bifurcated whole loan of a $1.1 billion A-note, a $115.0 million B-note and a two-year maturity extension to February 2019. The trust component consists of a $225.4 million A-note and $23.6 million B-note. The A-note interest rate increases over time back to the original rate of 6.3%, while the B-note accrues interest.

Property performance has continued to decline year over year as occupancy continues to decline and the contractual debt service on the A-note continues to increase. According to the July 2017 rent roll, the property was 70% occupied, down from 79% in June 2016. As a result, the Q2 2017 debt service coverage ratio on the A-note was 0.53 times (x), down from 0.66x at YE2016 and 0.72x at YE2015. Reportedly, the property continues to suffer from dated floorplans and low ceilings, which is exacerbated by a lack of available funds from the sponsor, Kushner Companies, needed to retenant the vacancies. According to multiple news outlets, the sponsor is saddled with hundreds of millions of dollars of debt and has not had success in persuading domestic or foreign investors to invest in the property. Vornado Realty Trust (Vornado) does own a 49.5% stake in the property, which it purchased in 2011 for $80.0 million and the assumption of half of the outstanding debt. While Vornado is not willing to invest in the property until a larger strategy for the subject is developed; if the firm does become the sole owner of the property, its resources of available capital and experience in the Manhattan office market may lead to a positive outcome over time. According to CoStar, there are 21 office properties greater than 1.0 million sf in the Plaza District submarket. Current availability and asking gross average rental rates are 10.5% and $96.23 per square foot (psf). As the subject is currently operating well below both metrics, there is potential upside assuming major investment is made in the property.

The Skyline Portfolio loan (23.5% of the current pool balance) is secured by a portfolio of Class A and Class B office properties in Falls Church, Virginia, totaling over 2.6 million sf. The $678.0 million whole loan initially transferred to special servicing in April 2012 due to payment default after occupancy decreased as a result of the Department of Defense and its subcontractor tenants vacating the property. The loan was modified in November 2013 with trust modification terms, including an A-note of $105.0 million, a B-note of $98.4 million and a five-year maturity extension to February 2022; however, the sponsor, Vornado, gave back the title to the portfolio in December 2016 after the modified loan defaulted in April 2016.

According to CoStar, the portfolio has a current occupancy rate of 53.1%, which has remained relatively unchanged over the past year. Asking rental rates range from $28.00 psf gross to $32.00 psf gross. The One Skyline Tower remains 100% occupied by government service administration tenants and is reportedly up for sale; however, there are no known offers at this time. Vacancy in the submarket remains high at 36.1% with an average asking gross rental rate of $30.48 psf.

The portfolio was last valued at $201.0 million in November 2016, indicative of a whole-loan loan-to-value ratio of 337.3%. The portfolio is currently real estate owned and the special servicer is currently evaluating resolution strategies. Given the low valuation of the portfolio and the amount of vacant space across the portfolio, the resolution timeline is expected to be prolonged. DBRS expects the trust to experience a significant loss with the resolution of the loan

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

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

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