DBRS Morningstar Downgrades One Class of GS Mortgage Securities Trust 2014-GC22 and Changes Trends

DBRS Limited (DBRS Morningstar) downgraded one class of the Commercial Mortgage Pass-Through Certificates, Series 2014-GC22 (the Certificates) issued by GS Mortgage Securities Trust 2014-GC22:

-- Class F to C (sf) from CCC (sf)

DBRS Morningstar also confirmed the remaining classes of the Certificates as follows:

-- Class A-3 at AAA (sf)
-- 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 (high) (sf)
-- Class PEZ at A (high) (sf)
-- Class D at BBB (low) (sf)
-- Class X-C at BB (sf)
-- Class E at BB (low) (sf)

DBRS Morningstar also changed the trend on Classes E and X-C to Negative from Stable with this review. All other trends are Stable with the exception of Class F, which has a rating that generally does not carry a trend in commercial mortgage-backed securities (CMBS).

The downgrade and trend changes follow increased loan exposure for the largest loan in special servicing, EpiCentre, since the last rating action, in addition to a decline in valuation for the second-largest loan in special servicing, Westwood Plaza, and ongoing concerns for a suburban office loan, Maccabees Center, which remains on the servicer’s watchlist.

At issuance, the trust comprised 59 loans secured by 113 commercial properties with a total trust balance of $961.5 million. As of the February 2023 remittance, 51 loans secured by 80 properties remain in the trust with a total trust balance of $723.0 million, representing a collateral reduction of approximately 25%. Eleven loans, totaling 22.4% of the trust balance, are fully defeased. As of the February 2023 remittance, there are two loans representing 13.1% of the current pool balance in special servicing, including the third-largest loan. Eleven loans, representing 27.5% of the current pool balance, are on the servicer’s watchlist, including the largest loan in the pool, Maine Mall (Prospectus ID#1, 15.2% of the pool balance).

The EpiCentre loan (Prospectus ID#3, 11.8% of the pool balance) is secured by a 304,722-square-foot mixed-use retail and office property in Charlotte, North Carolina. The loan transferred to the special servicer in March 2021 for imminent default and subsequently missed its June 2021 maturity date. A receiver was appointed one month later, and the loan became real estate owned (REO) in August 2022.

According to the January 2023 rent roll, the subject was 30.7% occupied, down slightly from 38.0% at YE2021 and down significantly from 78.0% at YE2019 and 89.9% at issuance. The property has faced significant challenges over the past several years, including declining occupancy and a string of violent crimes prior to and following the onset of the Coronavirus Disease (COVID-19) pandemic. The largest current tenants include Bowlero Charlotte (8.9% of the net rentable area (NRA), lease expiry in December 2027), CVS Pharmacy (4.5% of NRA, lease expiry in January 2029), and Novant Medical Group (4.3% of NRA, lease expiry March 2024). Leases representing 4.6% of the NRA are scheduled to roll over the next 12 months. As of the most recent financial reporting, the loan recorded a debt service coverage ratio (DSCR) of -0.04 times (x) for the trailing nine months ended September 30, 2022, compared with the YE2021 and YE2020 figures of 0.26x and 1.35x, respectively.

The most recent appraisal, dated July 2022, valued the property at $86.8 million, which is relatively unchanged from the August 2021 appraised value of $87.0 million but well below the $130.5 million at issuance. Per an article from The Charlotte Observer dated September 2022, CBRE is in the midst of a major rebrand and renovation for the property and recently renamed it Queen City Quarter. With repairs to deferred maintenance nearing completion, CBRE is also focusing on renovations and upgrades to the property’s common areas and security systems. While these efforts are likely to improve the property’s condition, it is uncertain whether they will translate to increased leasing and stabilized performance. DBRS Morningstar’s analysis includes a liquidation scenario based on a stress to the appraised value to reflect this uncertainty, resulting in a loss severity above 30%.

The second-largest loan in special servicing is Westwood Plaza (Prospectus ID#22, 1.4% of the pool balance), an anchored retail center in Johnstown, Pennsylvania, approximately 70 miles east of Pittsburgh. The subject was originally anchored by a local grocery store, which vacated in 2016. Occupancy began to decline soon after issuance to 50% at YE2022 from 88% at YE2014. The largest tenant is a medical center, occupying 29.8% of the NRA on a lease expiring in November 2023. The loan transferred to special servicing in 2019 for payment default and became REO in May 2022. An appraisal dated October 2022 valued the property at $7.5 million, down from $8.9 million in November 2021 and $15.7 million at issuance. Given the property’s dated appearance, tertiary location, and upcoming tenant roll, DBRS Morningstar’s analysis included a liquidation scenario, which is based on a stress to the appraised value, resulting in a loss severity of nearly 60%.

DBRS Morningstar also remains concerned about Maccabees Center (Prospectus ID#12, 2.5% of the pool balance). The loan is secured by a 12-story Class B office complex in Southfield, Michigan, a northwest suburb of Detroit. The servicer added the loan to its watchlist in September 2021 for occupancy and DSCR declines. As of the June 2022 rent roll, the subject is only 35.1% occupied, down from 83.0% at YE2019, following the departure of the two previous largest tenants in 2020. Per a Reis report, the North Southfield submarket reported a high Q4 2022 average vacancy rate of 30.1%, which will present challenges to the borrower in backfilling empty space. Although the loan reported a negative net cash flow in 2021, it remains current and the borrower appears to be funding operating and debt service shortfalls as well as depositing into the leasing reserve, which reported a balance of $1.0 million in the February 2023 remittance report. DBRS Morningstar’s analysis of this loan includes an elevated probability of default.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Classes X-A, X-B, and X-C 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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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.

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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