Press Release

DBRS Morningstar Downgrades Three Classes of GS Mortgage Securities Trust 2014-GC26, Removes Three Classes from Under Review with Negative Implications

CMBS
February 25, 2021

DBRS Limited (DBRS Morningstar) downgraded three classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-GC26 issued by GS Mortgage Securities Trust 2014-GC26 as follows:

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

DBRS Morningstar also removed Classes D, E, and F from Under Review with Negative Implications, where they were placed on August 6, 2020.

In addition, DBRS Morningstar confirmed its ratings on the following classes:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class PEZ at A (sf)

DBRS Morningstar discontinued its rating on Class A-3 as it was repaid with the February 2021 remittance. DBRS Morningstar also discontinued its ratings on Classes X-C and X-D because the reference obligations, Classes E and F, were downgraded to CCC (sf).

Classes C, PEZ, and D have Negative trends. Classes E and F have ratings that do not carry a trend. All other trends are Stable.

The rating downgrades reflect DBRS Morningstar’s outlook for the ultimate resolution of the largest loan in the pool, Queen Ka’ahumanu Center (Prospectus ID#1, 8.2% of the pool), which transferred to special servicing in June 2020 for imminent monetary default. As of the February 2021 remittance, the loan was last paid in October 2020 and is more than 90 days delinquent. Although a workout strategy has yet to be finalized, the special servicer has confirmed that foreclosure and receivership is being pursued, while dual tracking other alternatives. The collateral property is an anchored retail center in Kahului, Hawaii, anchored by Macy’s, Macy’s Men and Home, and Sears, all of which are part of the collateral. The property has reported net cash flow (NCF) and overall sales declines since 2017, with the property showing issues even prior to the Coronavirus Disease (COVID-19) pandemic. The loan reported a YE2019 NCF of $3.4 million and a debt service coverage ratio (DSCR) of 0.79 times (x), compared with a YE2018 DSCR of 1.15x and a YE2017 DSCR of 1.39x. Comparatively, the DBRS Morningstar-adjusted NCF at issuance was $5.7 million, with a DBRS Morningstar-adjusted DSCR of 1.05x. The loan had an initial five-year interest-only (IO) period, which expired in November 2019.

The cash flow declines have been entirely driven by revenue drops from issuance, as total expenses have generally been reported in line with or even significantly below the issuance figures. Revenue declines have been driven by lower rental rates and slight occupancy declines, with rates ranging between 90.0% and 93.0% between 2017 and 2019, compared with an occupancy rate of 93.0% at issuance. The servicer provided a December 2020 rent roll that showed an occupancy rate of 88.4%, suggesting that the coronavirus pandemic has accelerated these trends to a certain extent.

Given the sustained declines in revenue, the likelihood that further declines are coming, and the property’s exposure to Sears (which appears to be on the way to closing all of its stores) and Macy’s (which has announced plans to close at least 20% of its store count over the next three years), the risks for this loan are significantly increased from issuance. As part of this review, a deep haircut to the issuance appraisal was assumed in an applied liquidation scenario for this loan that resulted in a loss severity in excess of 50.0%.

The trust had realized losses of $12.9 million as of the February 2021 remittance, reflecting the most recent loan liquidation of the Staybridge Suites Lafayette loan (Prospectus ID#27) which was resolved with an $8.2 million loss. All losses to date have been contained to the nonrated Class H. These prior losses combined with the liquidation scenario assumed for the Queen Ka’ahumanu Center loan suggest significant negative pressure on the lowest-rated classes, Classes E and F, which were downgraded to CCC (sf) with this review, and also for Class D, which was downgraded to B (high) (sf) with this review.

According to the February 2021 remittance, 80 of the original 92 loans remain in the trust, representing a collateral reduction of 15.6% since issuance. The pool is fairly concentrated by property type, with 41.9% of the pool secured by retail properties and 26.2% of the pool secured by office properties. Five loans, representing 11.3% of the current pool balance, are in special servicing and 14 loans, representing 26.7% of the current pool balance, are on the servicer’s watchlist. The watchlisted loans are being monitored for tenant rollover, low DSCRs, and/or occupancy issues, some of which are caused by disruptions related to the coronavirus pandemic.

The third-largest loan in the pool, the 5599 San Felipe loan (Prospectus ID#3, 7.4% of the pool), is secured by a Class A office property in Houston’s Galleria submarket. This loan is on the watchlist because of a low DSCR, with Q3 2020 financials reporting a DSCR of 1.08x, compared with a YE2019 DSCR of 2.07x and a DBRS Morningstar-adjusted DSCR at issuance of 1.56x. The decline in NCF is a result of the coronavirus pandemic, as base rent and parking income have declined over the YE2019 figures. The property is well occupied, with the occupancy rate reported at 92.4% as of the Q3 2020 financials; however, DBRS Morningstar notes that the property’s largest tenant is Schlumberger Limited, an oil and gas firm that occupies 72.1% of the net rentable area and has been in the news in recent years because of mass layoffs and possibly moving its headquarters from the subject property. Although plans to move the headquarters do not appear to have materialized, challenges for the firm amid the current economic environment and previous downturns in the energy markets remain. In addition to the tenant risk, the submarket is soft, with a Q4 2020 vacancy rate of 23.7%, according to Reis. According to the servicer, a portion of Schlumberger Limited’s tenant improvement reserve was used to cover the tenant’s base rent instead of for future improvements to the space. Based on the February 2021 loan-level reserve report, the tenant improvement reserve had an ending balance of $5.3 million. Given these increased risks, DBRS Morningstar applied a probability of default penalty for this loan to increase the expected loss in the analysis for this review.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-A and X-B 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 the following loans in the transaction:

-- Prospectus ID#1 – Queen Ka'ahumanu Center (8.2% of the pool)
-- Prospectus ID#3 – 5599 San Felipe (7.4% of the pool)
-- Prospectus ID#25 – Hilton Garden Inn Cleveland Airport (1.2% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found on 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 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 info@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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