DBRS Morningstar Finalizes Provisional Ratings of GB Trust 2020-FLIX

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-FLIX issued by GB Trust 2020-FLIX (the Issuer):

-- Class A at AAA (sf)
-- Class X-CP at A (sf)
-- Class X-NCP at A (sf)
-- Class X-FP at A (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)

CAST Certificates
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)

All trends are Stable. Class A is a CAST Class. CAST classes can be exchanged for other classes of CAST certificates and vice versa, as described in rating report for this transaction.

The GB Trust 2020-FLIX transaction is collateralized by four Class A creative office buildings and three studio lots in the Hollywood section of Los Angeles. The properties come together to form a synergistic creative campus in Hollywood that is attractive for tenants in the content creation space; a similar dynamic exists in some of the biomedical office portfolios in markets such as Boston that benefit from their proximity to research universities.

Goldman Sachs Mortgage Company (70%; Note A-1) and Barclays Capital Real Estate Inc. (30%; Note A-2) originated the five-year (two years plus three one-year extensions) loan that pays floating-rate interest of Libor plus 2.15% on an interest-only (IO) basis through the initial maturity of the loan. There are interest rate escalations upon the exercise of the extension options. The borrowers purchased interest rate cap protection for the trust mortgage from SMBC Capital Markets, Inc. at a strike price of 3.50%, which DBRS Morningstar used as the base interest rate for the purpose of debt service calculations. The entire $900 million mortgage loan is being securitized in this transaction.

The $900 million whole loan represents a relatively conservative loan-to-value ratio of 78.53% on the DBRS Morningstar concluded value, which is below the typical leverage point for most single-asset/single-borrower transactions. Additionally, there is no existing additional debt in the form of a B note or mezzanine debt, and the sponsor acquired a 49% joint venture interest in the properties and contributed almost $344 million in cash equity at close (in addition to the $353 million of HPP implied equity).

The office component has no scheduled lease expirations until over five years after loan maturity, and the studio component benefits from unique, longer-term lease structures that are less commonly seen when it comes to studio properties. The properties have also performed well despite disruptions related to the ongoing Coronavirus Disease (COVID-19) pandemic, achieving recent collections of approximately 98% across the portfolio. The office component is composed of four buildings, three of which, ICON, CUE, and EPIC, are fully leased to Netflix. These buildings were built in 2016, 2017, and 2020, respectively. The EPIC building is brand new and currently in various stages of delivery to Netflix, with floors six to eight already delivered and the remainder of the floors slated for delivery between October 2020 and April 2021. Netflix received approximately $71 million in tenant improvement allowances ($95 per square foot) across all three properties and reportedly invested additional dollars above and beyond that figure into its space.

The fourth building is a built-to-suit Class A office building leased to Technicolor Creative Services USA, Inc., which has been at the property since 2008. Technicolor recently extended its lease, which was originally scheduled to expire in 2020, through 2032. The Technicolor lease has a termination option in May 2027, which requires a minimum of 12 months' notice and a termination penalty in excess of $6.3 million.

The studio component of the portfolio is composed of three studio properties totaling approximately 1.2 million square feet, which includes 34 stages, control rooms to support multicamera productions, and support space for dressing rooms, wardrobe, and hair/makeup, as well as on-set office space, which is primarily used by directors and producers. The studio properties had an aggregate in-place occupancy of 86.7% as of August 1, 2020, and is approximately 68.0% leased to major tenants including Netflix, Disney, ABC, KTLA, and CBS/Viacom. The studio properties feature a campus-like setup with gated entry, which is particularly attractive for tenants who place a premium on privacy.

In addition to base rental revenue and parking, the studio space generates additional revenue through various value-add services including control room rentals and light and grip revenue. Tenants at the studio properties are required to use the sponsor's grip and light rental services, the rates for which are typically negotiated into the leases. The sponsor does not own any of the grip or light equipment, which is provided to the tenants through a revenue sharing with MBS. The contract is a five-year agreement that runs through end of 2023. Over half of the grip and lighting revenue is contractually guaranteed (subject to dark minimums)—and only about 6% flowing through to net operating income is truly variable. The properties, specifically the studio component, benefit from high barriers to entry. There have been no substantial deliveries of new studio space to the Los Angeles market in the past 20 years, in part because the high cost of land would make it economically unattractive to construct new studio space. The office and studio components collectively form what is effectively a creative campus for digital content, which DBRS Morningstar believes to be synergistic for tenants at both the office and the studio parcels. DBRS Morningstar believes that demand for creative digital content is likely to continue over time, and the properties collectively serve as major hub for one of the largest digital streaming services and content producers in the world. Netflix added more than 15 million subscribers in Q1 2020 and currently has over 182 million total subscribers. Furthermore, Netflix spent approximately of $14.7 billion on content in 2019 according to the firm's 10-K report.

The studio component of the transaction requires specialized knowledge and expertise in order to operate and lease effectively. For example, HPP handles leasing of the studio component through an in-house sales team that specializes in managing relationships with various space users. The pool of potential buyers either for the studio component or the portfolio as a whole may be more limited than other, more traditional property types. The studio component of the transaction requires specialized knowledge and expertise in order to operate and lease effectively. Therefore, the pool of potential buyers either for the studio component or the portfolio as a whole may be more limited than other, more traditional property types.

The loan allows for pro rata paydowns for the first 20% of the unpaid principal balance. The loan has been structured with a partial pro rata/sequential-pay structure. DBRS Morningstar considers this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata structure, deleveraging of the senior notes through the release of individual parcels occurs at a slower pace verses a sequential-pay structure. As a result, DBRS Morningstar applied a penalty to the transaction's capital structure. Individual parcels are permitted to be released with customary requirements. However, the prepayment premium for the release of individual assets is 105.0% for the first 20.0% of the loan balance and 110.0% of the balance thereafter. DBRS Morningstar considers the release premiums to be weaker than those of other recently rated single borrower deals, and as a result, applied a penalty to the transaction's capital structure.

DBRS Morningstar is also monitoring the ongoing effects of the coronavirus pandemic on operations at the properties, as well as the Los Angeles office and studio market and more.

The mortgage loan is IO through the full five years of its five-year term and does not benefit from deleveraging through amortization.

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), 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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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