DBRS Confirms Two Classes of GE Commercial Mortgage Corporation, Series 2007-C1

DBRS Limited (DBRS) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2007-C1 issue by GE Commercial Mortgage Corporation, Series 2007-C1 as follows:

-- Class A-M at BB (low) (sf)
-- Class A-MFX at BB (low) (sf)

Both classes carry Negative trends that have been maintained by DBRS to reflect the risks with the nine loans in special servicing (54.1% of the pool balance) and the largest loan in the pool, Prospectus ID#1, 666 Fifth Avenue (31.7% of the pool balance), which is on the servicer’s watchlist.

Since issuance, there has been a collateral reduction of 79.9% because of successful loan repayments, scheduled amortization, realized losses from liquidated loans and proceeds recovered from liquidated loans. The transaction is in wind-down and is concentrated by loan size as the four largest loans represent 88.9% of the current pool balance. This concentration is particularly problematic for the transaction as the three largest loans, representing 74.6% of the pool balance, each exhibit material performance issues.

The largest loan in the transaction, 666 Fifth Avenue, is part of a pari passu whole loan secured by a 1.4 million square foot (sf) Class B office tower located in Manhattan, New York. The loan was modified in December 2011 and has been on the servicer’s watchlist since. The modification resulted in the creation of a $1.2 billion A-note and a $115 million B-note, with a maturity extension to February 2019. At the time of the loan modification, Vornado Realty Trust (Vornado) acquired a 49.5% stake in the property from the loan sponsor, the Kushner Companies (Kushner).

The property has historically underperformed and continues to do so, with an occupancy rate of 72.6% as of the January 2018 rent roll. The property’s vacancy rate is high as compared with the vacancy rate of similar office properties of 9.6% in the submarket as of May 2018, according to CoStar. There has not been an updated appraisal obtained since issuance, when the property was valued at $2 billion ($1,375 psf); however, this value has likely significantly declined since that time, given the performance declines that have been sustained for the past several years. DBRS calculated a rough value estimate based on YE2017 NCF, applying a 5.0% cap rate, which suggested an as-is value of approximately $637.7 million ($437 psf), well below the current whole loan A-note balance of $1.2 billion. Multiple news outlets have been reporting since early April 2018 that Vornado has a “handshake” agreement in place with Kushner to buy out its 49.5% stake, but these reports have not been confirmed by the servicer and funds do not appear to have changed hands as of the date of this press release. News reports have also suggested that Kushner is courting international firms to secure takeout financing for the upcoming 2019 maturity, but most outlets appear to agree a full takeout is unlikely without a significant cash infusion from Kushner or a new equity partner.

In the analysis for this review, DBRS assumed a full loss on the B-note for this loan and applied a stressed cash flow scenario in the sizing for the remaining A-note balance, with the results suggesting a significant loss for the loan is likely.

The second-largest loan, Prospectus ID#4, the Skyline Portfolio loan (25.9% of the pool balance), is secured by a portfolio of eight 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 fell when the Department of Defense and its subcontractor tenants vacated the property. The loan was modified in November 2013, with the loan split into an A-note in the amount of $105.0 million and a B-note of $98.4 million, with a five-year maturity extension to February 2022. However, the loan ultimately defaulted for a second time in April 2016 and the portfolio has been real estate owned since December 2016.

As of the February 2018 rent roll, the portfolio was 44.6% occupied, with an average rental rate of $31.34 psf. The One Skyline Tower property remains 100% occupied by government tenants and is reportedly up for sale. According to a September 2017 appraisal obtained by the special servicer, the portfolio’s as-is value is valued at $301.9 million, implying a loan-to-value ratio of 224.6% on the outstanding whole loan balance. It is noteworthy that this figure is an increase over the last valuation from November 2016, when the as-is value was estimated at $201.0 million. In the analysis for this review, DBRS assumed a loss severity in excess of 70.0%.

The third-largest loan, prospectus ID#7, JP Morgan Portfolio, was previously secured by two properties in a 40-story, Class A office property and accompanying parking garage located in Phoenix, Arizona, and a 17-story office property in Houston, Texas. The loan was originally transferred to the special servicer in March 2017 for imminent default for the April 2017 balloon payment. In March 2018, the portion of the loan secured by the Phoenix property was sold, as reflected in the April 2018 remittance, when a principal paydown to the trust of $62.1 million was applied. News reports have suggested the property was recently acquired for a sales price of $78.8 million. The remaining Houston property was foreclosed and is now REO. The servicer’s reporting shows an updated appraised value of $52.0 million as of December 2017, down from the issuance figure of $63.2 million. Based on the remaining trust exposure of approximately $140.0 million, DBRS expects a substantial loss to be realized at final resolution.

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

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1, 666 Fifth Avenue
-- Prospectus ID#4, Skyline Portfolio
-- Prospectus ID#7, JP Morgan Portfolio
-- Prospectus ID#10, Wellpoint Office Tower

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS-rated transactions.

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.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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