DBRS Morningstar Confirms All Ratings on Citigroup Commercial Mortgage Trust 2014-GC25

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-GC25 issued by Citigroup Commercial Mortgage Trust 2014-GC25 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 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 X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (high) (sf)
-- Class E at BB (sf)
-- Class X-F at B (high) (sf)
-- Class F at B (sf)

All trends are Stable. The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last rating action.

As of the May 2023 remittance, 57 of the original 62 loans remain in the trust, with an aggregate principal balance of $710.7 million, reflecting collateral reduction of 15.6% since issuance as a result of loan amortization and repayment. There are 21 loans, representing 37.6% of the pool, secured by collateral that has been fully defeased. Excluding defeasance, the pool is most concentrated by loans secured by office, retail, and multifamily properties, representing 53.5%, 23.8%, and 13.5% of the pool, respectively. There are seven loans, representing 8.4% of the pool, on the servicer’s watchlist, and one only loan, representing 4.0% of the pool, in special servicing.

The majority of loans secured by office properties in this transaction continue to exhibit healthy credit metrics, reflecting a weighted-average debt yield of 7.5% based on the most recent financials available. However, DBRS Morningstar has a cautious outlook on this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords’ efforts to backfill vacant space, and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. While the largest two loans secured by office properties, Bank of America Plaza (Prospectus ID#1, 15.5% of the pool) and Fenley Office Portfolio (Prospectus ID#7, 7.5% of the pool), continue to perform in line with expectations, other select loans, including Stamford Plaza Portfolio (Prospectus ID#13, 4.0% of the pool), The Pinnacle at Bishop’s Woods (Prospectus ID#12, 4.0% of the pool), and Arrowhead Properties (Prospectus ID#25, 1.2% of the pool), have exhibited weaker performance than the pool as a whole. To further test the durability of the ratings, DBRS Morningstar’s analysis includes an additional stress for select loans, resulting in a weighted-average expected loss that is nearly two times the pool average expected loss. However, in addition to loan-level factors mitigating credit risks in some cases, the transaction benefits from increased credit support to the bonds as a result of scheduled amortization and loan repayments, as well as significant defeasance.

The Pinnacle at Bishop’s Woods loan is secured by a portfolio of three adjacent Class A office buildings in Brookfield, Wisconsin, totaling 248,175 square feet (sf) of net rentable area (NRA). The loan was initially added to the servicer’s watchlist in June 2021 because of a low debt service coverage ratio (DSCR), a decline in occupancy and deferred maintenance. The loan subsequently transferred to special servicing in March 2022 for payment default. A receiver has been appointed, and as of the May 2023 reporting the loan was 121+ days delinquent with workout discussions ongoing.

According to the March 2023 rent roll, the portfolio was 64.8% occupied, compared with 76.9% in June 2021 and 94.9% at issuance. The largest tenant, Travelers Indemnity Co. (Travelers), who originally occupied 21.4% of the total NRA, extended its lease to October 2026 from July 2021; however, Travelers downsized its space to 27,500 sf (11.0% of total NRA) from approximately 53,000 sf in conjunction with the lease extension. Lease rollover in the near term is moderate, as tenant leases representing 7.5% of the NRA are scheduled to expire within the next 12 months. The most recent financials provided are as of YE2021, when the loan reported a net cash flow (NCF) of $2.1 million (a DSCR of 1.12 times (x)), below the issuance NCF figure of $2.8 million (a DSCR of 1.52x).

No updated appraisal has been provided since issuance, when the property was valued at $45.2 million; however, DBRS Morningstar notes that the collateral’s value has likely declined significantly, elevating the loan’s leverage and credit risk to the trust. In addition, the loan sponsors and carveout guarantors were noted to have reported historical defaults, workouts, and foreclosures involving at least seven of their prior commercial loans. In its analysis for this review, DBRS Morningstar considered a liquidation scenario based on a stress to the issuance appraised value, resulting in an implied loss severity of almost 35.0%.

The largest loan on the servicer’s watchlist, Stamford Plaza Portfolio (Prospectus ID#13, 4.0% of the pool), is secured by four Class A office properties totaling 982,483 sf in Stamford, Connecticut. The trust debt of $28.2 million is a pari passu portion of the $270.0 million whole loan. The loan was added to the servicer’s watchlist in October 2018 for low occupancy and a stressed DSCR, which activated a cash trap. The borrower was granted a forbearance in August 2021, which allowed leasing reserves to be released and deposits to the account deferred until April 2022 with the depleted reserves to be repaid through April 2023. Per the May 2023 reporting, the loan had leasing reserves of $2.3 million and a replacement reserve of $4.7 million.

Cash flow and occupancy at the collateral properties have seen year-over-year declines since issuance. According to the YE2022 financials, the portfolio generated NCF of $5.3 million (a DSCR of 0.32x), significantly lower than the YE2021 and issuance figures of $9.2 million (a DSCR of 0.56x) and $22.8 million (a DSCR of 1.38x), respectively. As of December 2022, the collateral was 65.0% occupied with approximately 130,000 sf (13.2% of total portfolio NRA) set to roll within the next 12 months. According to multiple online news reports, ICON International (ICON) plans to lease 61,000 sf (6.2% of total portfolio NRA) across two floors at 107 Elm Street (Four Stamford Plaza). ICON was the portfolio’s second-largest tenant at issuance, occupying 77,000 sf (7.8% of NRA); however, ICON vacated in 2018 upon lease expiration, moving its headquarters to neighboring Greenwich. According to Reis, the Stamford Central Business District submarket reported a Q4 2022 vacancy rate of 24.0% and asking rental rates of $38.01 per sf.

Given the submarket’s soft fundamentals and sustained elevated vacancy rates across the portfolio, in addition to continued uncertainty related to end-user demand for this asset type, DBRS Morningstar increased the probability of default for this loan in its analysis. In addition, DBRS Morningstar derived a stressed value based on the property’s in-place cash flow, using the high end of DBRS Morningstar’s capitalization rate range for office properties, resulting in a modeled whole-loan loan-to-value ratio of more than 150.0%.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Classes X-A, X-B, X-D, X-E, and X-F 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 (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 version 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].