Morningstar DBRS Downgrades Credit Ratings on Six Classes of GS Mortgage Securities Trust 2014-GC24

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of Commercial Mortgage Pass-Through Certificates, Series 2014-GC24 issued by GS Mortgage Securities Trust 2014-GC24 (the Issuer) as follows:

-- Class C to BBB (sf) from A (sf)
-- Class PEZ to BBB (sf) from A (sf)
-- Class D to C (sf) from BB (high) (sf)
-- Class X-C to C (sf) from B (high) (sf)
-- Class E to C (sf) from B (sf)
-- Class F to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed its credit 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 X-B at AA (sf)
-- Class B at AA (low) (sf)

Morningstar DBRS changed the trends on Classes X-B, B, C, and PEZ to Negative from Stable. Classes D, X-C, E and F have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. The trends on Classes A-4, A-5, A-AB, AS and X-A are Stable.

The credit rating downgrades reflect increased loss projections since the last credit rating action, primarily attributed to the Stamford Plaza Portfolio loan (Prospectus ID#1, 16.3% of the pool), which has not reported an updated appraisal since issuance; however, Morningstar DBRS expects the value has declined significantly given the depressed performance. Additionally, as the deal is in wind-down, the majority of loans are scheduled to mature before the end of 2024, with increased default risk for a few select loans exhibiting weaker credit metrics.

According to the February 2024 reporting, 59 of the original 75 loans remain in the pool, representing a collateral reduction of 25.9% since issuance. Since last year, three loans have repaid from the trust, while the number of defeased loans has increased to 21, representing 33.4% of the pool balance. MHG Hotel Portfolio (Prospectus ID#23) was liquidated from the trust in October 2023 with a realized loss of $2.7 million, which was slightly higher than Morningstar DBRS’ projected loss estimate. The realized loss was contained to the nonrated Class G certificate. There are 17 loans, representing 26.6% of the pool, on the servicer’s watchlist, and only one loan, Beverly Connection (Prospectus ID#3, 10.7% of the pool), is in special servicing; however, the borrower signed a reinstatement agreement and the loan is likely to be returned to the master servicer in the near term.

As the transaction is in wind-down with the vast majority of loans scheduled to mature prior to the end of 2024, Morningstar DBRS’ credit ratings are based on a recoverability prospects for the remaining pool. For this review, Morningstar DBRS analyzed four loans with liquidation scenarios at a total loss of nearly $74.0 million, resulting in a complete principal write down of Classes E, F, G and a partial write down of almost 20% for Class D, supporting the credit rating downgrades on these certificates to C (sf). To date, the trust has incurred a total loss of $13.7 million, all contained to the non-rated Class G. The remaining downgrades and Negative trends reflect the significant credit erosion to the transaction as the pool winds down with the remaining loans scheduled to mature in the next couple of months.

The Stamford Plaza Portfolio is secured by four Class A office properties totaling 982,483 square feet (sf) in Stamford, Connecticut CBD. The trust debt of $129.8 million is a pari passu portion of the $250.0 million whole loan. The loan was added to the servicer’s watchlist in October 2018 for occupancy and debt service coverage ratio (DSCR) concerns. As of the September 2023 rent roll, the portfolio was 71.0% occupied, an improvement from 64.6% in September 2022, but down from 88.0% at issuance. The loan has consistently reported depressed cash flows for several years, with the DSCR well below breakeven since 2028. Per the trailing nine months ended September 30, 2023, the loan reported an annualized net cash flow (NCF) of $9.2 million (reflecting a DSCR of 0.56 (times)), representing nearly a 60% decline from the Issuer’s NCF of $22.8 million. According to the February 2024 loan level reserve report, the loan had approximately $1.9 million across four reserves, with $1.5 million held between replacement and leasing reserves.

The rent roll is relatively granular with no tenant representing more than 6.2% of the net rentable area (NRA). Rollover risk is relatively moderate with leases representing approximately 13.7% of the NRA rolling within the next year; however, this figure is more significant given the already low in-place occupancy rate. The sponsor, RFR Holding LLC RFR), acquired the subject property in 2007 and has reportedly spent a significant amount of capital upgrading the building interiors, exteriors, and systems. RFR is currently advertising approximately 30% of the vacant space as available for leasing at the average rental rate of $48.00 per sf (psf), higher than the current average in-place rental rate of $42.50 psf. According to Reis, the Stamford CBD submarket reported a Q4 2023 vacancy rate of 25.7% with asking rents of $46.92 psf.

While the borrower has maintained the loan current through sustained declines in performance, value has likely deteriorated significantly from the issuance appraised value of $460.7 million. Given the location of the collateral in an extremely soft market, coupled with the volatility in the office sector and the current interest rate environment, Morningstar DBRS believes the borrower will struggle to obtain a replacement loan despite their displayed commitment to the collateral, with any financing likely requiring a significant equity contribution. As a result, Morningstar DBRS assumed a conservative liquidation scenario based on 70% haircut to the issuance appraised value in an implied loss approaching $70.0 million, or a loss severity in excess of 50.0%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://dbrs.morningstar.com/research/410912).

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

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 credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down with majority of the loans in the pool maturing in 2024. In these cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loans.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0
(https://dbrs.morningstar.com/research/422859)

Rating North American CMBS Interest-Only Certificates (December 13, 2023;
https://dbrs.morningstar.com/research/425261)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023;
https://dbrs.morningstar.com/research/415687)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023;
https://dbrs.morningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023;
https://dbrs.morningstar.com/research/419592)

Legal Criteria for U.S. Structured Finance (December 7, 2023;
https://dbrs.morningstar.com/research/425081)

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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