DBRS Downgrades Three Classes of GSMS 2012-GCJ7

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

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

In addition, DBRS changed the trend on Class E to Negative from Stable. The trend on Class X-B remains Negative and the rating for Class F does not carry a trend.

DBRS confirmed the remaining classes with Stable trends 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)

The rating downgrades reflect DBRS’s concerns with the two loans in special servicing, 545 Long Wharf Drive (Prospectus ID#14, 2.4% of the pool) and Fifth Third Center (Prospectus ID#24, 1.3% of the pool). In addition, DBRS also has significant concerns with the second-largest loan on the servicer’s watchlist, Shoppes on Main (Prospectus ID#12, 2.8% of the pool), which is secured by a retail property that will be completely vacant in the near term following the departure of Walmart and pending departure of Burlington Coat Factory (Burlington). The trust previously took a loss with the liquidation of Independence Place, the 16th-largest loan in the pool at issuance, which was resolved with a loss of $8.3 million in April 2017. The loss was contained to the unrated Class G certificates, but lowered the balance of that class by 17.0%, reducing credit support for the lowest-rated bonds in the transaction, leaving them more vulnerable to negative movement in the resolution outlook for the delinquent loans in the pool.

The rating confirmations reflect the significant paydown since issuance, as well as the overall healthy performance of the bulk of the loans in the top 15 and the relatively significant defeasance in the pool, which represents 10.9% of the pool balance. As of the August 2018 remittance, there were 63 loans remaining of the original 79 loans, with a collateral reduction of 28.6% since issuance. There is one loan scheduled to mature in the next 12 months, representing 4.1% of the pool. This loan, 101 Ludlow (Prospectus ID#8) is defeased, representing 4.1% of the pool. The overall performance metrics are healthy, with a weighted-average (WA) in-place debt-service coverage ratio (DSCR) of 1.52 times (x) and a WA debt yield of 11.9% for the pool as based on the most recent year-end figures reported for the remaining non-defeased loans. Those figures compare with the DBRS WA Term DSCR and DBRS WA Debt Yield for the remaining loans at issuance of 1.39x and 9.9%, respectively. When excluding the specially serviced 545 Long Wharf Drive and the watchlisted Shoppes on Main loans, the WA DSCR for the largest 12 non-defeased loans (56.9% of the pool) was 1.73x as at YE2017, with a WA NCF growth of 23.3% over the DBRS issuance figures.

As of the August 2018 remittance, there were a total of 14 loans on the servicer’s watchlist, representing 15.6% of the pool balance, and two loans in special servicing, representing 3.7% of the pool. The majority of the loans on the watchlist are being monitored for low DSCR driven by occupancy issues, with some monitored for minor deferred maintenance and missing financial reporting.

As previously outlined, DBRS’s concerns with this pool are generally concentrated with the two loans in special servicing and the watchlisted Shoppes on Main loan. Shoppes on Main is secured by a retail property in White Plains, New York, approximately ten miles west of Greenwich, Connecticut. There is also mezzanine debt in place, with a balance of $9.0 million at issuance. DBRS has been monitoring the property for the loss of Walmart (68.0% of the net rental area (NRA) on a lease through July 2021) in early August 2018 and the subsequent announcement that the only remaining tenant, Burlington (31.0% of the NRA), would be vacating at lease expiry in January 2019. These events triggered a cash flow sweep for the loan, but as the structure allows for the mezzanine lender to be paid before funds are trapped, this structure is essentially useless in terms of protecting the senior loan. Given these factors, DBRS applied a stressed cash-flow scenario for this loan to significantly increase the probability of default and will monitor closely for developments.

Both of the loans currently in special servicing were transferred in 2017 and are secured by office properties in secondary markets. The 545 Long Wharf Drive loan is secured by a mid-rise office building in New Haven, Connecticut, and was transferred to special servicing following the property’s loss of AT&T, which formerly represented 72.1% of the NRA. The special servicer obtained a May 2017 appraisal that placed the property’s as-is value at $9.7 million, but a subsequent January 2018 appraisal valued the property at $10.3 million on an as-is basis. The value remains well below the $46.0 million value at issuance and, based on DBRS’s analysis, implies a loss severity in excess of 75.0%.

The Fifth Third Center loan is secured by an office building in Dayton, Ohio, and was transferred to special servicing when the loan failed to repay at the April 2017 maturity date. Occupancy rates have steadily fallen since issuance, with near-term lease expiries and a pending downsize for the largest tenant remaining, Fifth Third Bank (20.7% of the NRA through October 2019). The special servicer’s most recent appraisal, dated June 2018, estimated an as-is value of $6.0 million, a sharp decline from $29.5 million at issuance and indicative of a loss severity in excess of 90%, based on DBRS’s analysis.

For additional information on the loans in special servicing and the larger loans on the servicer’s watchlist, please see the loan commentary on the DBRS Viewpoint platform, for which information has been provided below.

Classes X-A and X-B are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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:

-- Bellis Fair Mall (Prospectus ID#3, 7.2% of pool)
-- 110 San Diego Plaza (Prospectus ID#9, 4.2% of pool)
-- Shoppes on Main (Prospectus ID#12, 2.8% of pool)
-- 545 Long Wharf Drive (Prospectus ID#14, 2.4% of pool)
-- Fifth Third Center (Prospectus ID#24, 1.3% of pool)
-- Arrowhead Promenade (Prospectus ID#45, 1.0% of pool)
-- Gem Suburban & Scenic Acres MHCs (Prospectus ID#65, 0.4% of pool)

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.

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.

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