DBRS Morningstar Downgrades Ratings on Five Classes of GS Mortgage Securities Trust 2014-GC26

DBRS, Inc. (DBRS Morningstar) downgraded its ratings on five classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-GC26 issued by GS Mortgage Securities Trust 2014-GC26 as follows:

-- Class C to A (low) (sf) from A (sf)
-- Class PEZ to A (low) (sf) from A (sf)
-- Class D to CCC (sf) from B (high) (sf)
-- Class E to C (sf) from CCC (sf)
-- Class F to C (sf) from CCC (sf)

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)

The trends for Classes C and PEZ were changed to Stable from Negative. Classes D, E, and F have ratings that do not carry trends. All other classes have Stable trends.

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, 8.6% of the trust balance), which has been in special servicing since June 2020. According to the special servicer, the lender was the winning bidder in an early December 2021 foreclosure sale and the trust is expected to take title sometime in early 2022. The collateral is a regional mall in Kahului, Hawaii, anchored by Macy’s and Macy’s Men and Home. The property lost its third anchor, Sears, in November 2021 and the property’s occupancy rate is projected to decline to approximately 73.0%. The collateral was last appraised in October 2020 for $47.0 million, down 60.8% from the $120.0 million appraised value at issuance. An updated appraisal is expected in the near term and the value is anticipated to be lower than the October 2020 appraised value given the loss of Sears.

Based on these factors, DBRS Morningstar believes the resolution will result in a loss severity in excess of 60.0%, with projected losses expected to affect the unrated Class H, as well as the rated Classes G, F, and E, supporting the C (sf) ratings for those classes. Based on the available information as of this review, losses are expected to be contained to the Class E and below certificates. The Class D certificate, which was downgraded to CCC (sf), has a balance of $95.0 million, providing significant cushion against losses for the Class C certificate, which was downgraded one notch to A (low), with the trend changed from Negative to Stable.

In addition, DBRS Morningstar is concerned about the third-largest loan in the pool, 5599 San Felipe (Prospectus ID#3, 7.7% of the trust balance), which has been on the servicer’s watchlist since December 2020 because of a low debt service coverage ratio (DSCR). This loan is secured by an office property in the Galleria submarket of Houston, Texas. According to the June 2021 rent roll, the primary tenant, Schlumberger Technology Corp (Schlumberger), is paying a base rental rate of $12.35 per square foot (psf), which is considerably below the rental rate at issuance. A lease modification was executed in April 2020 that allowed $2.4 million of proceeds from the lessee improvement allowance to be released to supplement income at the property to a breakeven level. The servicer confirmed Schlumberger is paying a rental rate of $19.50 psf as of January 2022. There are no termination options available in the Schumberger lease, which runs through 2027, but the tenant is marketing at least half of the space for sublease and was previously reported to be relocating employees to a new development. These factors significantly increase the refinance risk for this loan.

At issuance, the trust comprised 92 loans secured by 133 commercial and multifamily properties with a trust balance of $1.26 billion. As of the January 2022 remittance, 78 loans secured by 117 properties remained in the trust with a remaining trust balance of $998.3 million, representing collateral reduction of just over 20% since issuance. An additional 14 loans representing approximately 15% of the pool are defeased. Three loans, totaling $46.6 million, have liquidated from the trust, resulting in a $12.5 million loss to the trust to the unrated Class H certificate. The trust is concentrated in loans secured by retail properties, representing 36.5% of the trust balance. Five loans, representing 11.7% of the trust balance, are in special servicing and an additional 15 loans, representing 22.5% of the trust balance, are on the servicer’s watchlist.

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 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 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 (8.6% of the pool) – DBRS Morningstar Hotlist loan
-- Prospectus ID#3 – 5599 San Felipe (7.7% of the pool) – DBRS Morningstar Hotlist loan

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 26, 2021), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings

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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