DBRS Confirms Ratings of Deco 2014-Gondola S.R.L., Changes Class C, D and E Trends to Negative

DBRS, Inc. (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage-Backed Floating-Rate Notes Due February 2026 issued by Deco 2014-Gondola S.R.L.

-- Class A at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)

The Class X notes are not rated by DBRS. DBRS has also changed the trends on Classes C, D and E to Negative from Stable. The trends on Class A and Class B remain Stable. The trend changes are a result of the potential significant decrease in net operating income for the Delphine loan, which is discussed in greater detail below.

As at the May 2015 quarterly reporting, the aggregate balance of the transaction was EUR 345,760,388, representing a reduction of 2.6% since issuance.

The collateral comprises three commercial mortgage loans to Italian borrowers. The Delphine loan is secured by a Milan hotel, three Milan offices and one Rome office and represents 38% of the overall collateral pool. The Mazer loan is secured by 13 logistics warehouses throughout northern Italy and represents 38% of the collateral pool. The Gateway loan comprises 24% of the loan collateral and is secured on two regional shopping centres in the Veneto region of Italy.

The borrowers under the Delphine and Mazer loans are closed-end real estate funds in Italy. The borrowers under the Gateway loan are Airone Shopping Centre s.r.l. and Valecenter s.r.l., each an Italian company. The sponsors are Blackstone real estate funds.

While the Delphine loan has been performing in line with expectations, the largest tenant, RCS, served notice in December 2014 that it will vacate Unit 2, the largest of its three Milan office properties, in December 2015. The unit comprises 14,410 square metres (sq. m.) and its current annual rent is EUR 6.4 million. The total current annual gross rental income for the Delphine collateral as of May 2015 quarterly reporting is EUR 21.1 million. If the terminated lease rental cannot be replaced via re-letting, this could have a significant negative impact on the net operating income for this loan. According to the servicer, the space is being marketed by Cushman & Wakefield with negotiations ongoing with several potential tenants, including one that is interested in a 10,500 sq. m. space.

Regarding the Gateway loan, the smaller Airone centre continues to perform well; however, footfall at the larger of the two shopping centres, Valecenter, fell 13.3% in Q1 2014 compared with Q1 2015. Sales have also decreased 10.4% over the same period. The vacancy rate has increased from 22.8% to 24.4% owing to some retail tenants not renewing their leases in Q1 2015; however, some new small leases continue to be signed. The low occupancy rate of the office and leisure space continues to be the reason for the relatively high overall vacancy rate. As a result of recent decline in performance, the reported loan debt service coverage ration decreased in the latest quarter from 2.07 times (x) to 1.79x. The performance of the centre is reflective of the overall Italian economy, which currently demonstrates a weak and patchy recovery.

DBRS will monitor closely developments regarding the re-letting of Unit 2 backing the Delphine loan and leasing activity at the Valecenter, as well as any re-valuations that are undertaken in due course.

Notes:
All figures are in euros unless otherwise noted.

The principle methodology is European CMBS Surveillance Methodology.

The applicable methodologies are European CMBS Rating Methodology, European CMBS Surveillance, Legal Criteria for European Structured Finance Transactions and Unified Interest Rate Model for European Securitisations, which can be found on www.dbrs.com.

This rating is endorsed by DBRS, Inc. for use in the European Union.

The sources of information used for this rating include Deco 2014-Gondola S.R.L. and Situs Asset Management Limited. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The last rating action on this transaction took place on July 15, 2014.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

A decrease of 10% and 20% in the DBRS net cash flow (NCF), derived by looking at comparable properties, market rents and market occupancies, in addition to expenses ratios, capital expenditures and re-tenanting costs, would lead to the following ratings in the transaction, as noted below for each class respectively:

Class A Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class A at AA (sf)
-- 20% decline in DBRS NCF, expected rating of Class A at AA (sf)

Class B Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class B at AA (low) (sf)
-- 20% decline in DBRS NCF, expected rating of Class B at BBB (sf)

Class C Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at BBB (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at BB (high) (sf)
Class D Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at BB (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at B (high) (sf)
Class E Notes Risk Sensitivity:
-- 10% decline in DBRS NCF, expected rating of Class C at B (high) (sf)
-- 20% decline in DBRS NCF, expected rating of Class C at B (low) (sf)

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.