Morningstar DBRS Downgrades Credit Ratings on Six Classes of Citigroup Commercial Mortgage Trust 2014-GC25, Changes Trends on to Negative from Stable on Four Classes

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-GC25 issued by Citigroup Commercial Mortgage Trust 2014-GC25 as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes 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)

Morningstar DBRS changed the trends on Classes D, E, X-D, and X-E to Negative from Stable. All other trends are Stable, with the exception of Classes F and X-F, which are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

The credit rating downgrades and Negative trends reflect Morningstar DBRS' increased loss projections for the pool. The sole loan in special servicing, Pinnacle at Bishop's Woods (Prospectus ID#12, 4.1% of the pool), received an updated appraisal, reflecting a significant value decline for the underlying collateral--a portfolio of three adjacent Class A office buildings--since issuance. With this review, Morningstar DBRS considered a liquidation scenario for that loan, resulting in total implied losses approaching $15.0 million, which would erode the nonrated Class G balance by approximately 50.0%. Outside of the specially serviced loans, the pool's largest and fourth largest loans Bank of America Plaza (Prospectus ID#1; 15.9% of the pool) and Stamford Plaza Portfolio (Prospectus ID#13; 4.0% of the pool), continue to exhibit increased default risk, details of which are outlined below. Morningstar DBRS notes that those loans could see reduced commitment from the respective borrowers and/or face difficulty securing replacement financing in the near to moderate term as performance declines from issuance and decreased tenant demand have likely eroded property values, further supporting the Negative trends on Classes D, E, X-D, and X-E. In the analysis for this review, Morningstar DBRS stressed those loans with an elevated probability of default (POD) penalty and/or loan-to-value ratio (LTV) to reflect the risk of maturity default, resulting in a weighted-average (WA) expected loss (EL) that was approximately 60.0% greater than the pool average. Additionally, the transaction is in wind-down with the majority of loans scheduled to mature in Q3 and Q4 2024.

As of the April 2024 remittance, 56 of the original 62 loans remain in the pool, with a trust balance of $691.6 million, representing a collateral reduction of 17.9% from issuance. Twenty-four loans, representing 46.2% of the pool balance, are fully defeased. In addition, 32 loans, representing 49.7% of the current pool balance, are on the servicer's watchlist; however, 22 of those loans, representing 39.8% of the current pool balance, are being monitored for upcoming maturities and reported a WA debt service coverage ratio (DSCR) of approximately 1.8 times (x) as of the most recent year-end financials.

The largest loan in the pool, Bank of America Plaza, is secured by a 1.4 million-square-foot (sf) Class A office complex in the Central Business District of Los Angeles. Although the loan saw an improvement in performance during the prior year, reporting a year-end (YE) 2023 occupancy rate and net cash flow (NCF) figures of 86.2% and $36.5 million (a DSCR of 2.23x), respectively, compared with the YE2022 figures of 84.8% and $28.9 million (a DSCR of 1.76x), 13 tenants, representing 21.2% of the total net rentable area (NRA), have leases scheduled to expire prior to YE2024. According to the servicer, the former fourth-largest tenant at the property, Alston & Bird LLP (5.6% of NRA), vacated upon lease expiry in December 2023, and the third-largest tenant, Shepperd Mullin Richer (12.7% of NRA), has indicated it will vacate the property upon lease expiry in December 2024. As a result, the property's implied occupancy rate will likely fall below 70.0% shortly after loan maturity in September 2024, further challenging the borrower's efforts to secure takeout financing.

According to Reis, vacancy and average asking rental rates for Class A office properties within a one-mile radius were reported at 14.6% and $46.00 per sf (psf), respectively, as of YE2023, compared with the subject property's average in-place rental rate of $25.54 psf. Given the property's dated construction in 1974, with the most recent renovations reported in 2009, coupled with the anticipated increase in vacancy, downtown Los Angeles location, and increased capitalization rate environment, Morningstar DBRS notes that the property's as-is value has likely declined significantly from issuance. The issuance LTV was moderate at 66.1%, providing some cushion against the projected value deterioration to date; however, Morningstar DBRS anticipates an elevated LTV well in excess of 100.0% if vacancy were to fall below 70.0%. As such, Morningstar DBRS analyzed the loan with a stressed LTV ratio and an increased POD penalty, resulting in an expected loss (EL) that was approximately 40.0% greater than the pool average.

The Pinnacle at Bishop's Woods loan (Prospectus ID#12, 4.1% of the pool), is secured by a portfolio of three adjacent Class B office buildings in Brookfield, Wisconsin. The loan was initially added to the servicer's watchlist in June 2021 because of a low DSCR, a decline in occupancy and deferred maintenance issues, subsequently transferring to the special servicer in March 2022 for payment default. According to the April 2024 reporting, the loan is 90+ days delinquent having last paid in December 2022. According to the servicer, a receiver is in place with plans to address life safety issues across the portfolio and actively market vacant space in an effort to stabilize the assets. A receiver sale for disposition of the assets was slated to be filed in April 2024. Morningstar DBRS has reached out to the servicer to inquire about the status of the filing, but a response remains outstanding as of the date of this press release.

Performance across the portfolio has continued to deteriorate since the on-set of the pandemic with the YE2023 reporting reflecting a consolidated occupancy rate of 59.1%, compared with 64.8% in March 2023, 76.9% in June 2021, and 94.9% at issuance. Likewise, NCF has trended downward with the YE2023 figure of $806,021 (a DSCR of 0.43x), considerably below the issuance figure of $2.8 million (a DSCR of 1.52x). In addition, near-term lease rollover is elevated as tenant leases representing approximately 20.0% of the NRA are scheduled to expire within the next 12 months according to the most recent rent roll dated March 2023. According to the October 2023 appraisal, the property reported an as-is value of $21.1 million, a substantial decline from issuance appraised value of $45.3 million. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in a loss severity in excess of 50.0%.

The Stamford Plaza Portfolio is secured by four Class A office properties totaling 982,483 square feet (sf) in Stamford, Connecticut. The trust debt of $27.6 million is a pari passu portion of the $248.7 million whole loan. The loan was added to the servicer's watchlist in October 2018 for a low occupancy rate and DSCR. As of December 2023, the portfolio was 69.0% 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 2020. Per the YE2023 financial reporting, the portfolio generated $9.6 million of NCF (a DSCR of 0.58x), representing an approximately 60.0% decline from the Issuer's NCF of $22.8 million. As of April 2024, approximately $2.0 million is being held in reserve accounts.

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 the portfolio's vacant space for lease with an asking rental rate of $48.00 psf, higher than the current average in-place rental rate of approximately $43.0 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 kept the loan current through sustained declines in performance, Morningstar DBRS estimates the collateral's as-is value has deteriorated significantly from issuance, with a balloon LTV ratio well over 100.0%, suggesting refinance risk at maturity in August 2024 remains high. Morningstar DBRS analyzed the loan with an elevated POD penalty and stressed LTV ratio, resulting in an expected loss that was approximately 130.0% greater than the pool average.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factor(s) 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, 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 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 1, 2024; https://dbrs.morningstar.com/research/428798).

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 info-DBRS@morningstar.com.

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.

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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 (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)

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 (April 15, 2024; https://dbrs.morningstar.com/research/431205)

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 info-DBRS@morningstar.com.