DBRS Confirms Ratings on GS Mortgage Securities Trust 2013-GC10

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates issued by GS Mortgage Securities Trust 2013-GC10 as follows:

--Class A-1 at AAA (sf)
--Class A-2 at AAA (sf)
--Class A-3 at AAA (sf)
--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 AAA (sf)
--Class B at AA (high) (sf)
--Class C at A (high) (sf)
--Class D at BBB (sf)
--Class E at BB (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 expectations. At issuance, the collateral consisted of 61 fixed-rate loans secured by 93 commercial properties. Since then, one loan prepaid from the trust and as of the November 2015 remittance, the pool balance was approximately $808.3 million, representing a collateral reduction of 5.9% since issuance. Loans representing 92.9% of the pool have year-end (YE) 2014 financials and 92.8% of the pool has either Q2 2015 or Q3 2015 financials reported. Based on the YE2014 financials, the pool had a weighted-average debt service coverage ratio (DSCR) of 1.58 times (x) and weighted-average debt yield on the current trust balances of 9.9%, which is above DBRS underwritten term DSCR of 1.56x and debt yield of 9.4%. Two loans, representing 3.0% of the current pool balance, are fully defeased.

As of the November 2015 remittance, there are no delinquent loans; however, 11 loans are on the servicer’s watchlist and one loan is in special servicing, representing 10.5% and 0.5% of the current pool balance, respectively.

The largest loan on the watchlist, Prospectus ID 17, Arbor Village Apartments, representing 1.4% of the current pool balance, was flagged for a relatively minor deferred maintenance item that is not likely to adversely affect the performance of the property or the loan. As of YE2014, the DSCR for that loan was 1.75x and occupancy was reported at 98.3%. Five of the watchlist loans, collectively representing 4.8% of the current pool balance, reported YE2014 cash flows which show a weighted average decline of 23.2% from DBRS underwritten levels. To account for the increased risk with those negative cash flow trends, DBRS modeled the in-place cash flows for each as part of this review. The other six loans on the watchlist show reported cash flows that are in line or better than the DBRS underwritten levels. Three of the watchlist loans and the specially serviced loan are detailed, below.

601 West Main (Prospectus ID#18, 1.4% of the current pool balance) is secured by a 171,368 square foot (sf) office building in Spokane, Washington. This loan was placed on the watchlist because occupancy has been declining, with occupancy at 73.5% as of June 2015, down from the in-place level of 84.1% at issuance. In addition, the June 2015 rent roll indicates that tenants representing 23.7% of the net rentable area (NRA) have leases that have expired or will be expiring within the next 12 months. Those tenants include the second and third largest tenants, Wells Fargo Insurance Services (6.9% of the NRA with a lease that expired in July 2015) and Sadler, Breen, Morasch & Colby, P.S. (6.9% of the NRA with a lease that expires in July 2016). DBRS has requested a leasing update and a current rent roll from the servicer and is currently awaiting a response. According to CoStar, the Spokane central business district reported an average vacancy rate of 9.5% and availability rate of 13.8%, which is below the property’s vacancy rate of 26.5%. Based on the Q2 2015 operating statement analysis report (OSAR), the annualized DSCR was 1.35x which is a decrease from YE2014 DSCR of 1.84x and DBRS underwritten DSCR of 1.61x. This loan was modeled with an elevated probability of default to reflect the declining trend in occupancy and the potential tenant rollover risk. DBRS will continue to monitor this loan and provide updates as they become available.

Okee Square (Prospectus ID#20, 1.3% of the current pool balance) is secured by a 124,000 sf retail center in West Palm Beach, Florida. At issuance, the property was 78.6% occupied, anchored by Michaels, Staples, Rooms To Go Kids and Bed Bath & Beyond. One vacant anchor space, representing 21% of the NRA, has historically been occupied on a temporary basis by Spirit Halloween, who was in place for the 2015 season and has since vacated. The loan was placed on the watchlist due to significant upcoming rollover. According to the servicer’s commentary, Bed Bath & Beyond (23.1% of NRA) will vacate the property at its lease expiration in February 2016, relocating to a center that accompanies Palm Beach Outlets, which is situated approximately two miles north of the subject in an area that has recently been attracting big box tenants from the subject’s location along Okeechobee Boulevard. With Spirit Halloween and Bed Bath & Beyond out, the property’s occupancy will fall to 55.9%, with remaining anchors Staples and Michaels set to expire in 2018 and Rooms To Go Kids expiring in 2019. The servicer advises that the borrower is in discussions with a potential tenant for the property, but no concrete leasing developments are available at this time.

As Bed Bath & Beyond has declined to renew the lease, per the terms of the Loan Agreement, the lender will reserve excess cash flow after making all obligatory payments, including the debt service, one year before lease expiration. Excess cash flows have been deposited into the tenant reserve and to date, the ending balance is approximately $776,000. According to the Q2 2015 OSAR, the annualized DSCR was 1.36x as compared to the YE2014 DSCR of 1.22x and the YE2013 DSCR of 1.26x. The DBRS underwritten term DSCR was 1.45x. Historical cash flows have not met the DBRS underwritten expectations because of high operating expenses incurred, which were above the Issuer’s underwritten estimates. Large expense items affected include property insurance, payroll, and general and administrative costs. Given the decline in performance from the underwritten levels and the likelihood of further cash flow declines pertaining to increases in vacancy at the property, DBRS has modeled the loan with an elevated probability of default. DBRS will continue to monitor this loan and provide updates as they become available.

Hewlett Shopping Center (Prospectus ID#26, 1.2% of the current pool balance) is a 32,100 sf unanchored retail property in Hewlett, New York. This loan was placed on the watchlist in 2014 because the largest tenant, Loehmann’s, which formerly occupied approximately 50.1% of the NRA, filed for bankruptcy and vacated their space in December 2013. As a result, the property was 49.9% occupied at YE2013, but has rebounded back to 100% as of the October 2015 rent roll as the former Loehmann’s space was leased to two new tenants in Petco (41.6% of NRA) and Hand & Stone (7.8% of NRA) on ten-year leases with commencement dates in October and December 2015, respectively. The rental rates for these new tenants are in line with the rental rate paid by Loehmann’s. Based on the Q2 2015 financials, the annualized DSCR was at 0.62x, a decrease from YE2014 DSCR of 0.83x, YE2013 DSCR of 1.57x and the DBRS underwritten DSCR of 1.38x. As the new tenants are in place and paying rent, the 2016 cash flow figures should show improvement back to historical levels.

Eaton Center (Prospectus ID#51, 0.5% of the current pool balance) is secured by a 129,112 sf anchored retail property located in Eaton, Ohio. This loan was transferred to special servicing in November 2015 because of the borrower’s noncompliance in establishing a cash management account as required by the terms of the Loan Agreement. In addition to the noncompliance with the cash management agreement, the borrower has been making late payments (within 30 days of the due date) on the loan. According to the September 2015 rent roll, the property was 78.4% occupied which is a decline from previous years’ occupancy of 83.3%. In addition, tenants representing 14.0% of NRA have leases that are expired or will be expiring within the next 12 months including the second largest tenant, Kroger Limited Partnership (Kroger), which currently occupies 7.7% of NRA with a lease expiration in February 2016. Kroger has been at the property since 1991 and most recently renewed its lease in February 2011. The tenant has three five-year renewal options available but in the event Kroger does not renew, all excess cash flow is to be transferred to a leasing reserve dedicated leasing costs for the Kroger space. In addition to the Kroger reserve, the servicer is also collecting a general TI/LC reserve. To date, the current balance of the TI/LC reserve is approximately $198,000.

DBRS has requested a leasing update regarding Kroger’s upcoming lease expiration and is currently awaiting a response. According to the Q2 2015 OSAR, the annualized DSCR was 1.34x, a decrease from YE2014 DSCR of 1.61x, YE2013 of 1.44x and DBRS underwritten DSCR of 1.57x. Due to the borrower’s lack of cooperation in establishing cash management, the lack of timely debt service payments, and potential tenant rollover risk, this loan was modeled with an increased probability of default. The special servicer has not outlined a workout strategy for this loan. DBRS will continue to monitor and provide updates as they become available.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The November 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact DBRS at info@dbrs.com.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.