DBRS Morningstar Changes Trends on Two Classes of GS Mortgage Securities Trust 2014-GC26 to Negative, Confirms All Ratings

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-GC26 issued by GS Mortgage Securities Trust 2014-GC26 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 X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class D at CCC (sf)
-- Class E at C (sf)
-- Class F at C (sf)

DBRS Morningstar also changed the trends on Classes C and PEZ to Negative from Stable. The trends on all other classes are Stable, with the exception of Classes D, E, and F, which have ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings.

The rating confirmations reflect performance that remains generally in line with DBRS Morningstar’s expectations since the last rating action, while the Negative trends follow increasing concerns surrounding the pool’s exposure to office space, specifically with regard to the second-largest loan in the pool, which is discussed below. As of the March 2023 remittance, 73 of the original 92 loans remain in the trust, with an aggregate balance of approximately $904.3 million, representing a collateral reduction of 27.9% since issuance. Twenty-one loans are fully defeased, representing 22.5% of the pool balance. Four loans are in special servicing, representing 11.7% of the pool balance. Fourteen loans are on the servicer’s watchlist, representing 17.5% of the pool balance.

The largest loan in the pool and in special servicing is Queen Ka'ahumanu Center (Prospectus #1, 9.2% of the pool). The loan is secured by the borrower’s fee-simple interest in a 570,904-square-foot (sf) super-regional mall in Kahului, Hawaii. The loan transferred to special servicing in July 2020 and became real estate owned (REO) in June 2022. According to the January 2023 rent roll, the mall was 75.6% occupied, compared with 75.8% at YE2021. The largest collateral tenants are Macy’s (14.0% of the net rentable area (NRA), lease expiry in October 2024), Macy’s Men and Home (14.5% of the NRA, lease expiry in November 2024), and Ben Franklin (2.3% of the NRA, lease expiry in September 2024). There is high upcoming rollover risk, with leases representing 23.6% of the NRA scheduled to expire within the next 12 months, in addition to the three largest tenants, whose leases are all scheduled to roll in 2024. The most recent appraisal reported by the servicer, dated July 2022, valued the property at $44.2 million, down from a 2020 appraised value of $47.0 million and well below the issuance appraised value of $120.0 million. DBRS Morningstar’s analysis included a liquidation scenario resulting in a loss severity in excess of 65%.

The second-largest loan in special servicing, Hilton Garden Inn Cleveland Airport (Prospectus #25, 1.4% of the pool), is secured by a 67-unit limited-service hotel property in Cleveland, Ohio. The loan transferred to special servicing in May 2020 for payment default. According to the most recent special servicer commentary, the noted workout strategy is foreclosure; however, discussions with the borrower remain ongoing. An STR report dated August 2021 indicates that the occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) for the trailing 12-month period were 41.4%, $99.69, and $41.23, respectively. A November 2022 appraisal valued the property at $14.9 million, relatively in line with the June 2021 appraised value of $15.0 million, but down 32.3% from the issuance appraised value of $22.0 million. DBRS Morningstar’s analysis included a liquidation scenario, resulting in a loss severity in excess of 25%.

As part of this analysis, DBRS Morningstar also liquidated from the pool the two remaining loans in special servicing. Holiday Inn Express & Suites Houston North (Prospectus #51, 0.7% of the pool) and La Quinta Brandon (Prospectus #72, 0.4% of the pool) both transferred to special servicing at the beginning of the Coronavirus Disease (COVID-19) pandemic and are now REO assets. The projected loss severities for these two loans are in excess of 80%.

In addition, DBRS Morningstar remains concerned about the second-largest loan in the pool, 1201 North Market Street (Prospectus #2, 8.6% of the pool). The loan is secured by a 447,439-sf high-rise office property located in the central business district (CBD) of Wilmington, Delaware, and was added to the servicer’s watchlist in September 2020 because of a low debt service coverage ratio (DSCR). Occupancy has been in decline year over year since issuance. According to the November 2022 rent roll, the property was 73.0% occupied, down from 77.1% at YE2021, 79% at YE2019, and 84.5% at issuance. The largest tenants include Morris Nichols Arsht & Tunnell (18.7% of the NRA, lease expiry in December 2028), The Siegfried Group (6.8% of the NRA, lease expiry in October 2028), and DaSTOR Wilmington LLC (5.1% of the NRA, lease expiry in December 2032). Leases representing 6.9% of the NRA have scheduled expirations over the next 12 months. According to the most recently reported financials, the DSCR for the trailing nine months ended September 30, 2022, was 1.14 times (x), compared with 1.06x at YE2021 and 1.35x at YE2019. While the loan is currently in cash management, servicer commentary indicates there is not enough excess cash flow to trap. Per a Reis report from Q4 2022, Wilmington CBD office space reported an average vacancy rate of 21.5% with a five-year forecast of 20.6%. Given the soft submarket and continued underperformance since issuance, DBRS Morningstar increased the probability of default for this loan in its analysis.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), which was recently updated on March 16, 2023 (the updates were deemed to be not material) and 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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