DBRS Morningstar Confirms All Classes of Citigroup Commercial Mortgage Trust 2014-GC19

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-GC19 issued by Citigroup Commercial Mortgage Trust 2014-GC19 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class PEZ at AA (sf)
-- Class C at AA (sf)
-- Class D at BBB (high) (sf)
-- Class X-C at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-D at BB (high) (sf)
-- Class F at BB (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since the last rating action. The transaction benefits from a relatively low concentration of loans secured by office collateral, with only four loans, representing 6.7% of the current pool, and one loan, representing 11.5% of the pool, secured by a mixed-use property with a significant office component. Only one of these five loans, representing 0.6% of the pool, is being monitored on the servicer’s watchlist and the five office-backed loans reported a weighted-average (WA) YE2022 debt service coverage ratio (DSCR) of 1.42 times (x). Given the shift in demand for office space following the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar anticipates upward pressure on vacancy rates in the broader office market. With all five office-backed loans scheduled to mature in Q1 2024, DBRS Morningstar applied stressed loan-to-value (LTV) ratios to account for the possibility of value declines and increased refinancing difficulties. Following these adjustments, these loans reported WA expected losses (EL) over 35.0% greater than the pool WA EL.

The elevated refinance risks in the current environment for the loans secured by office properties are partially mitigated by the meaningful paydown since issuance and the increase in defeasance since DBRS Morningstar’s last review. As of the April 2023 remittance, 66 loans remain in the pool with a trust balance of $662.5 million, representing a collateral reduction 34.8%. Since DBRS Morningstar’s last review, defeasance has increased by approximately $44.1 million, as 31 loans, representing 41.9% of the current pool, are fully defeased. In addition, just five loans, representing 9.1% of the current pool, are being monitored on the servicer’s watchlist and one loan, Festival Plaza (Prospectus ID#19, 1.7% of the current pool), is in special servicing and is now real estate owned. DBRS Morningstar analyzed this loan with a liquidation scenario, applying a haircut to the loan’s most recent appraised value of $6.2 million as of November 2022, resulting in an implied loss severity in excess of 60.0%.

The largest loan in the pool, CityScape – East Office/Retail (Prospectus ID#2, 11.5% of the current pool), is secured by a mixed-use office/retail property in Phoenix, Arizona. The property consists of 581,000 square feet (sf) of office space and 76,000 sf of retail space. The loan has performed in line with DBRS Morningstar’s expectations, although cash flow had trended lower each year through 2021 from 2018, culminating with occupancy dropping to a low of 78.9% as of September 2022 following the departures of several tenants. The DSCR dropped to 1.10x in 2020 and 2021 before increasing back to 1.42x as of YE2022. According to the December 2022 rent roll, occupancy increased to 99.0% after tenant Snell & Wilmer LLP (19.1% of net rentable area (NRA)) took occupancy in November 2022 and signed a long-term lease to October 2037. The tenant is paying a base rent of $42.72 per square foot (psf), significantly above the average base rent of $31.94 psf for other office tenants at the property. There is no tenant rollover scheduled in the next 12 months. With the increase in occupancy to 99.0% and lack of rollover in 2023, the loan appears to be reasonably positioned ahead of its January 2024 maturity. DBRS Morningstar did not make any probability of default adjustments in the model for this loan; however, given the concerns in the broader office market, a stressed LTV was applied, resulting in an elevated EL that was approximately 40.0% greater than the WA pool EL.

The largest loan on the watchlist is 136-138 West 34th Street (Prospectus ID#7, 4.5% of pool). The loan is secured by a 25,000-sf retail building along 34th Street in Midtown Manhattan, and matures in January 2024. Occupancy decreased to its current level of 50.0% after Sprint Spectrum, one of the property’s two tenants at issuance, exercised an early termination option and vacated in December 2020 prior to its November 2023 lease expiration. Sprint Spectrum paid a termination fee of $1.2 million, which is being held in reserve. A short-term lease was signed with Simple Capital Partners in Q4 2022, temporarily bringing occupancy back to 100%; however, as of April 2023, occupancy declined back to 50.0% after the tenant vacated its space following its lease expiration in February 2023. DBRS Morningstar inquired about the current leasing prospects for this space and was notified by the servicer that the borrower is in the early stages of interest from three prospective tenants, with nothing concrete established to date. In absence of any leasing activity, the property’s cash flow will not be sufficient to cover the loan’s debt service. As of YE2021, the loan reported a DSCR of 0.92x and, as of the T-9 period ended September 30, 2022, the loan reported a DSCR of 0.79x. The property’s remaining tenant, Kay Jewelers (50.0% of NRA), has a lease expiration in December 2024. Given the lack of leasing activity and depressed performance, DBRS Morningstar analyzed this loan with an elevated probability of default, resulting in an EL over 75.0% greater than the WA pool EL.

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, X-B, X-C, and X-D 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 the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].