DBRS Morningstar Downgrades Two Classes and Confirms Remaining Classes of GS Mortgage Securities Trust 2013-GC10

DBRS Limited (DBRS Morningstar) downgraded its ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2013-GC10 issued by GS Mortgage Securities Trust 2013-GC10 as follows:

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

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- 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 B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (sf)

DBRS Morningstar changed the trends on Classes X-B and C to Negative from Stable, while the trends on Classes D and E remain Negative. Class F does not carry a trend given the distressed rating, and DBRS Morningstar also maintained the Interest in Arrears designation on Class F. Classes A-4, A-5, A-AB, A-S, X-A, and B have Stable trends.

The rating downgrades and Negative trends are reflective of DBRS Morningstar’s increased loss expectations for loans in special servicing and on the DBRS Morningstar Hotlist. According to the January 2022 remittance, 53 of the original 61 loans remain in the pool with a total trust balance of $645.8 million, representing a collateral reduction of 24.9% since issuance. There are two loans in special servicing, representing 17.9% of the pool balance, and this includes the largest loan in the pool, Empire Hotel & Retail (Prospectus ID#1, 15.9% of the pool balance). There are eight loans on the servicer’s watchlist, representing 10.5% of the pool balance, and 21 loans that are fully defeased, representing 22.2% of the pool balance.

The Empire Hotel & Retail loan is secured by a full-service hotel and ground-floor retail space located in New York City. The loan had a history of declining performance prior to the Coronavirus Disease (COVID-19) pandemic and prior to its transfer to special servicing in June 2021 for payment default. The borrower had requested relief as a result of the pandemic and a loan modification is reportedly near finalization. The terms of modification include an extension option, a conversion to interest-only payments for the remainder of the term, and a reduction in interest rate for a period of 18 months, conditional upon a substantial borrower-funded equity infusion. The subject was closed for an extended period of time throughout the pandemic. While it appears to have reopened as of Q3 2021, certain areas are expected to become unavailable as the borrower completes a planned $6.5 million renovation project. The August 2021 appraisal value of $137.0 million reflects a 65.1% decline from the issuance value of $393.0 million and a loan-to-value ratio of 122.8% based on the outstanding whole-loan balance. DBRS Morningstar notes the increased propensity for interest shortfalls based on the loan’s reduced note rate. Given the increased risks, DBRS Morningstar’s analysis included a probability of default penalty to reflect increased loss expectations associated with this loan.

The One Technology Plaza loan (Prospectus ID#13, 2.0% of the pool balance) is secured by an office property in Peoria, Illinois, and was transferred to special servicing in December 2021 for imminent monetary default. This loan is on the DBRS Morningstar Hotlist because of historic underperformance with year-over-year declines to occupancy. The property was 75.0% occupied as of the December 2021 rent roll, but DBRS Morningstar expects this figure to decline further with the scheduled departure of the largest tenant, Robert Morris University (20.6% of net rentable area (NRA)), whose lease expired in December 2021, and Illinois State Government Department (13.2% of NRA), which is expected to vacate in March 2022. There is also significant tenant rollover risk in the near term, with leases representing an additional 25.9% of the NRA scheduled to expire in 2022.

ESG CONSIDERATIONS
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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Classes B and C, as the quantitative results suggested lower ratings. The material deviations are warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist, as discussed in the detailed commentary above.

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 – Empire Hotel & Retail (15.9% of the pool)
-- Prospectus ID#13 – One Technology Plaza (2.0% of the pool)
-- Prospectus ID#15 – 701 Technology Drive (2.0% 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 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 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.

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 [email protected].

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