DBRS Morningstar Confirms All Ratings on GS Mortgage Securities Corporation Trust 2017-FARM, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-FARM, issued by GS Mortgage Securities Corporation Trust 2017-FARM:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class HRR at AA (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The collateral consists of a 2,031,293-square foot (sf) office park comprising five Class A office buildings and two retail buildings in Tempe, Arizona. The property was built by State Farm Mutual Automobile Insurance Company and its affiliates (State Farm) in 2016 for an estimated construction cost of $700.0 million to $750.0 million ($345 per square foot (psf) to $369 psf) per the appraisal. In December 2017, the property was sold to a joint venture between JDM Partners LLC and Transwestern Investment Group for $930.0 million in a sale-and-leaseback transaction from State Farm.

The property is in the Mill Avenue District of Tempe, which is quickly becoming one of the most desirable submarkets in Phoenix. This submarket has experienced a flurry of new development, as large block office tenants have led the transition to new, modern office buildings. The location offers walkable access to downtown Tempe (0.5 miles) and is adjacent to Arizona State University, highways, and public transportation. Reis reports that in the broader Tempe submarket, Class A vacancy is 16.7% and the average asking rental rate is $28.91 psf. The subject is on the northern border of the Tempe submarket in a less heavily developed area, with the surrounding properties including comparable offices, new multifamily space, vacant parking lots, and a run-down flour mill, which is why the road is named Mill Avenue and the greater area is named Mill Avenue District.

State Farm, a high-investment-grade-rated company, strategically chose this location in an effort to consolidate small regional offices within the Greater Phoenix area and because the neighbourhood has the ability to attract and retain a talented workforce. This location houses all facets of State Farm office operations, including a State Farm call centre, automobile insurance, home insurance, banking, executive space, and back-office space. State Farm’s five leases are for 100.0% of the office space, the first of which has an initial lease term through November 2032, and the remaining leases have staggered expirations two years to three years apart, with the last lease ending in November 2042. Furthermore, there are no termination options within any of the State Farm leases. The current lease rate of $26.00 (net) is in line with both the appraiser’s market rent estimate and similar lease comparables. The loan has been structured with an anticipated repayment date (ARD) in January 2028 and a final maturity date five years beyond the ARD in January 2033. This five-year tail allows for substantial principal repayment prior to the first State Farm lease expiry in 2032. Additionally, the DBRS Morningstar property net cash flow (NCF) analysis is highly dependent upon income generated from State Farm, and any future downgrades to State Farm’s credit rating may affect DBRS Morningstar’s analysis and ratings on this transaction. In addition, the amortization credit DBRS Morningstar gave to the ARD period is highly dependent on the rating of State Farm.

The subject is 96.8% leased by one tenant. The property is leased to a high-investment-grade tenant with a very low risk of bankruptcy. However, any future downgrades to State Farm’s credit rating would likely affect DBRS Morningstar’s analysis and ratings for this transaction because the DBRS Morningstar property NCF analysis is highly dependent upon income generated from State Farm. In addition, the credit DBRS Morningstar gave to the ARD period is also highly dependent on the rating of State Farm. State Farm has five separate leases that have staggered expiration dates, with the first expiring in November 2032 (21.7% of State Farm’s net rentable area (NRA) and 21.0% of the overall NRA), and even if State Farm were not to renew that lease, the remaining four leases adjusted for inflation would result in a DBRS Morningstar debt service coverage ratio in excess of 2.0 times. The State Farm leases are staggered with two- to three-year buffers between lease expiration dates that allow management ample time to re-lease one building before another lease expires. The offices were built in a manner that enables them to be easily re-leased to another single tenant or as a multitenant space. According to the appraiser’s dark value estimate, the subject has a value of $573.0 million ($283 psf), which is only $13.0 million more than the initial loan amount but $238.7 million higher than the DBRS Morningstar estimated loan balance at final maturity.

The DBRS Morningstar NCF derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” In the analysis for these rating actions, the DBRS Morningstar NCF figure of $55.7 million derived at issuance was accepted and a cap rate of 8.0% was applied, resulting in a DBRS Morningstar Value of $695.7 million, a variance from the appraised value of $896.0. The DBRS Morningstar Value implies an LTV of 80.5%, as compared with the LTV on the issuance appraised value of 62.5%.

The cap rate applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the high quality of the collateral, strong yet concentrated tenancy, and secondary market location. In addition, the 8.0% cap rate applied is above the implied cap rate of 7.0% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 4.5% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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

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