DBRS Morningstar Assigns Ratings to GSCG Trust 2019-600C

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-600C issued by GSCG Trust 2019-600C (the Issuer) as follows:

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

Classes A, B, C, X, and D have Stable trends. Classes E, F, and G have Negative trends because DBRS Morningstar is concerned about the property’s exposure to WeWork, which accounts for 51.8% of the asset’s net rentable area (NRA). Although there is a long-term lease in place, the company has shuttered many of its facilities since the outbreak of the Coronavirus Disease (COVID-19) pandemic, and an infusion of liquidity from its largest investor, Softbank, failed to materialize. This places the company at increased risk with significantly reduced revenue.

The Class X balance is notional.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about August 5, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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.

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 for the GSCG 2019-600C Mortgage Trust is a $240.0 million first-lien mortgage loan secured by an approximately 359,154-square foot, 20-story, Class A office property with ground-floor retail and a three-level, below-grade parking garage located at 600 California Street in San Francisco. The sponsor, Ark Capital Advisors, LLC (Ark), used the loan proceeds to acquire the property for $322.8 million, or $898 per rentable square foot. Including a transfer tax of approximately 3%, the total purchase price was $332.5 million, or $926 per rentable square foot. The trust loan balance of $240.0 million results in a 74.3% loan-to-purchase price excluding the transfer tax, 72.2% including the transfer tax, and a 64.8% LTV ratio based on the as-stabilized appraised value of the collateral at $370.0 million. Ark is a joint venture among Ivanhoe Cambridge, the Rhone Group, and The We Company, which is the parent of WeWork.

The property, which was built in 1991, is in very good condition and was awarded the LEED Gold certification in 2009 and 2016. It has benefited from the prior owner’s investment of $8.9 million in capital improvements. The building sports an atrium-style lobby, clad in marble and granite with state-of-the-art systems. Major capital improvements include the full lobby renovation; addition of a new management office, a fitness center, and a bike room; a new roof membrane; and boiler room replacements. In addition, the sponsor’s planned capital improvement program includes an additional $11.6 million in elective capital improvements to modernize the building’s elevators; add exterior waterproofing to the building; upgrade the building’s HVAC system and common area restrooms; and replace the cooling towers.

The subject benefits from its desirable location, within the strong and historically stable North Financial District submarket in San Francisco. The Financial District has the highest concentration of Fortune 500 companies occupying space in the San Francisco central business district. The property is situated at the corner of California Street and Kearny Street, bordering the Union Square and Chinatown neighborhoods. The building has good exposure with approximately half-block frontage on California Street, a primary two-way, four-lane major arterial that runs east to west in downtown San Francisco, and a full block of frontage on Kearny Street, which is a primary street that runs north to south through San Francisco. The location affords excellent access to public transportation, with four BART subway lines that stop twice in the Financial District and transport commuters to and from San Francisco and the East Bay.

The property exhibits significant tenant concentration, with the three largest tenants—WeWork (51.8% of the NRA); Cardinia Real Estate LLC, a subsidiary of Omnicom Group Inc. (11.6% of the NRA); and Audentes (8.3% of the NRA)—accounting for 71.7% of the NRA. The property has significant exposure to WeWork, whose future remains unclear as it attempts to shed spaces and restructure after its failed initial public offering. Moreover, WeWork will face ongoing challenges resulting from its shutdown during the coronavirus pandemic and the failure of Softbank, its managing member and controlling equity partner to fund additional liquidity as was agreed before the pandemic. Additionally, WeWork, is a subsidiary of The We Company, which is an affiliate of the borrower. However, this concern is mitigated by the organizational arrangement of Ark which is structurally independent of The We Company. Furthermore, none of the leases at the property have termination clauses and the three largest tenants have lease expirations beyond the loan term, with at least one built-in five-year extension option at lease expiration.

The DBRS Morningstar net cash flow (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.” The resulting NCF figure was $14.7 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $217.1 million, a variance of -41.3% from the appraised value at issuance of $370.0 million. The DBRS Morningstar Value implies an LTV of 110.6%, as compared with the LTV on the issuance appraised value of 64.8%. The NCF figure applied as part of the analysis represents a -16.1% variance from the Issuer’s NCF, primarily driven by leasing costs and vacancy.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for Office properties, reflective of the location, market position, and quality. In addition, the 6.75% cap rate applied is above the implied cap rate of 4.72% 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, totaling 3.0% to account for cash flow volatility, property quality, and market fundamentals.

ESG CONSIDERATIONS
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 www.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 www.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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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