Morningstar DBRS Downgrades Two Classes and Changes Trends on Four Classes of GS Mortgage Securities Trust 2014-GC26

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2014-GC26 issued by GS Mortgage Securities Trust 2014-GC26 as follows:

-- Class C to BB (sf) from A (low) (sf)
-- Class PEZ to BB (sf) from A (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- 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 D at CCC (sf)
-- Class E at C (sf)
-- Class F at C (sf)

The trends on Classes A-S, B, X-A, and X-B were changed to Negative from Stable while the Negative trends on Classes C and PEZ were maintained. Classes D, E, and F have ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. All other classes have Stable trends.

The credit rating downgrades and trend changes follow increased loss projections for the loan in special servicing in addition to concerns about a number of loans at increased risk of maturity default. All loans remaining in the pool are scheduled to mature within the next six months. While Morningstar DBRS expects the majority of loans will repay from the pool, a concentrated number of loans exhibit increased default risk given weak credit metrics. Ten loans, including the second-, third-, and fourth-largest loans in the pool—representing 34.3% of the pool balance in aggregate—are current on payments but have been identified by Morningstar DBRS as being at risk for maturity default. Although the trends on Classes A-S and B have been changed to Negative from Stable, the rating confirmations on those classes are supported by the significant existing credit support given the large outstanding balances. However, should these loans default as they near their respective maturity dates, Morningstar DBRS’ loss projections may increase to reflect additional adverse selection, further supporting the credit rating downgrades and Negative trends. Additionally, Morningstar DBRS’ ratings are constrained by the expectation of accrued interest shortfalls prior to repayment, which has also contributed to Morningstar DBRS’ rating downgrades and trend changes. Interest shortfalls currently total $6.2 million, up from a total interest shortfall amount of $4.0 million at the time of the last rating action. Unpaid interest continues to accrue month over month, driven by special servicing fees and appraisal subordinate entitlement reduction from the loan in special servicing. Morningstar DBRS has minimal tolerance for unpaid interest to high investment-grade rated bonds, limited to one to two remittance cycles for the AA (sf) and A (sf) credit rating categories.

The largest loan in the pool and the only loan in special servicing is Queen Ka'ahumanu Center (Prospectus #1; 9.5% 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 in June 2022. According to the November 2023 rent roll, the subject was 79.3% occupied, relatively flat from the YE2022 rate of 76.0%, however, 23.3% of the net rentable area (NRA) is leased on a temporary basis. Per the special servicer, ownership is not pursuing long-term leases given the ongoing multifamily redevelopment plans for sections of the mall. Concurrently, ownership is working with Macy’s to amend the reciprocal ease agreement to facilitate the redevelopment plans. Although progress has been made with the plans for redevelopment, the year-over-year declines in the property’s as-is value indicate significant loss at resolution. The most recent appraisal reported by the servicer, dated June 2023, valued the property at $38.5 million, down from a 2022 appraised value of $44.2 million and well below the issuance appraised value of $120.0 million. Morningstar DBRS analysis included a liquidation scenario based on the most recent appraisal resulting in a loss severity approaching 80%.

The second-largest loan in the pool is secured by 1201 North Market Street (Prospectus ID#2; 8.8% of the pool), a high-rise office property in Wilmington, Delaware. The loan is currently on the servicer’s watchlist for low debt service coverage ratio (DSCR), which was reported at 1.19 times (x) as of the Q3 2023 financials, compared with 1.04x in YE2022 and the Morningstar DBRS-derived figure of 1.43x at issuance. In addition, cash flows have declined over the past few years. The decline in performance has stemmed largely from shifts in the office sector since the onset of the coronavirus pandemic with an increase in work-from-home and hybrid-work options. The subject has exhibited consistent declines in occupancy, reporting an occupancy rate of 71.8% as of September 2023 compared with 73.0% in YE2022 and 84.5% at issuance. The largest tenant is the law firm Morris Nichols Arsht & Tunnell (lease expiry in December 2028), occupying 18.5% of the NRA), and no other tenant occupies more than 8% of the NRA. Leases representing 5.7% of the NRA are scheduled to expire in 2024. Morningstar DBRS remains concerned about the loan's refinance prospects given its upcoming maturity in November 2024, declining credit metrics, and soft submarket. To reflect this concern, Morningstar DBRS stressed the probability of default (POD) and the loan-to-value ratio (LTV), resulting in an expected loss (EL) more than twice the pool average.

As of the February 2024 remittance, 70 of the original 92 loans remain outstanding with a pool balance of $865.3 million, representing a collateral reduction of 31.0% since issuance. Of the remaining loans, 24, representing 30% of the pool balance, have fully defeased. There are currently 10 loans, representing 16.4% of the pool balance, on the servicer’s watchlist, eight of which have been flagged for performance-related issues. By property type, the pool is mostly concentrated by retail and office, representing 33.0% and 25.4% of the pool balance, respectively. In general, the office sector has been challenged, given the low investor appetite for that property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. Office loans and other loans that have exhibited increased risk were analyzed with stressed LTVs and/or elevated POD penalties, as applicable. The resulting weighted-average (WA) EL for these loans was nearly double the WA EL for the pool.

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) at https://dbrs.morningstar.com/research/427030.

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 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 the 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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. 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

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. (July 17, 2023).

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