DBRS Morningstar Assigns Ratings to LCCM 2013-GCP Mortgage Trust

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2013-GCP issued by LCCM 2013-GCP Mortgage Trust as follows:

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class XA at AAA (sf)
-- Class B at AA (high) (sf)
-- Class XB at A (sf)
-- Class C at A (sf)
-- Class D at A (low) (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about July 16, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The underlying loan is a first mortgage on Grand Central Plaza, a Class A office property located in the Grand Central submarket of Midtown Manhattan, New York, between 40th and 41st Streets. The 39-story property totals approximately 1.0 million square feet (sf), including ground-floor retail spaces totalling 37,276 sf. Originally built in 1974, the property was last renovated in 1998, with several other capital and tenant improvement projects undertaken since.

The trust consists of a $275.0 million mortgage loan with a 15-year term, with a partial interest-only (IO) period for seven years. The loan began amortizing with the March 2020 remittance and has a maturity scheduled in February 2028. There is also additional subordinate debt in the form of a $50 million mezzanine loan, which is held outside the trust. Total loan proceeds of $325.0 million were used to refinance existing debt and return $65.3 million of equity to the borrower. Based on the issuance appraisal of $630.0 million, the borrower had $310.0 million of implied equity remaining in the deal. The sponsor, Charles S. Cohen, is the President and Chief Executive Officer of Cohen Brothers Realty Corporation (CBRC), and has more than 50 years of real estate experience. His company, a private real estate development and management firm, reportedly has real estate holdings of more than 12 million sf. CBRC’s New York portfolio comprises nine Class A office towers in Midtown Manhattan.

The most significant risk is the property’s tenant exposure because the largest tenant, Interpublic Group of Companies, Inc. (IPG), represents 44.8% of the net rentable area (NRA) with an original lease expiration in September 2021. However, according to a New York Post article dated June 3, 2019, IPG signed a lease renewal for its entire space for an additional 15 years past the 2021 lease expiration. The tenant has been at the subject since 2000 and the asking rent on the lease renewal was reportedly $70.00 psf. As of May 2020, the servicer confirmed that the tenant extended its lease to March 2034. The tenant will be paying a base rental rate of $58.50 psf through to September 2021, followed by a $2.50 psf increase every two and a half years until the extended lease expiration in March 2034. DBRS Morningstar also notes that IPG has historically shown commitment to the property, with the company funding a $40 million renovation of its space at issuance. In general, tenant rollover risk is generally minimal for the remainder of the loan term with notable tenants Third Avenue Holdings (5.2% of the NRA) and J. Frank Associates (4.0% of the NRA) having lease expirations in August 2022 and December 2023, respectively.

According to the June 2019 rent roll (the most recent data analyzed by the servicer and provided to DBRS Morningstar), the property had an occupancy rate of 91.1% and an average rental rate of $54.78 psf, representing potential for cash flow upside as several tenants are paying below-market rents. As of Q4 2019 Reis data, comparable office properties within the Grand Central submarket reported an average rental rate of $80.42 psf and a vacancy rate of 7.7%. Properties of the same vintage reported an average rental rate of $86.51 psf and a vacancy rate of 7.0%. As of the June 2019 rent roll, IPG is paying a base rental rate of $58.50 psf through its original September 2021 lease expiration, indicating considerable rental upside with the recent lease renewal if the reported lease rate is accurate.

In the analysis for this review, DBRS Morningstar applied the Q2 2019 annualized net cash flow (NCF) figure of $30.7 million with a 2.0% haircut and a cap rate of 6.75%, resulting in a DBRS Morningstar Value of $445.1 million, a variance of 29.0% from the appraised value at issuance of $630.0 million. The DBRS Morningstar Value implies an LTV of 73.0%, as compared with the LTV on the issuance appraised value of 51.5%. The NCF figure applied as part of the analysis represents a -1.0% variance from the Issuer’s NCF. As of YE2018, the servicer reported a NCF figure of $26.0 million, a 13.0% variance from the Q2 2019 annualized NCF figure, primarily a factor of higher operating expenses within the YE2018 reporting period.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location, quality, and trophy-asset status. In addition, the 6.75% cap rate applied is above the implied cap rate of 4.8% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 5.0% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes XA and XB are 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 [email protected].

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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