DBRS Morningstar Confirms Ratings on GS Mortgage Securities Corporation Trust 2017-FARM

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

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The collateral is a first-lien mortgage on the borrower’s leasehold interest in the property known as Marina Heights State Farm, a 2 million-square-foot (sf) office complex in Tempe, Arizona, that consists of five Class A office buildings and two retail buildings. Completed between 2016 and 2017, the property was built by State Farm Mutual Automobile Insurance Company and its affiliates (State Farm) as part of an effort to consolidate small regional offices within the Greater Phoenix area into a single regional headquarters for the company’s southwestern markets. This location houses all facets of State Farm office operations, including a State Farm call center, automobile insurance, home insurance, banking, executive offices, and back-office operations.

The property is on a 99-year ground lease with the Arizona Board of Regents (on behalf of Arizona State University), which began in 2013 and expires in August 2112. Ground rent payments have varying start dates based on the eighth anniversary of when a particular building was granted a certificate of occupancy, with commencement dates between 2023 and 2026. As the ground lessor is a tax-exempt government agency, the property enjoys an exemption from property taxes.

Whole loan proceeds of $560 million, along with $375.7 million of cash and an imputed equity contribution of $22.5 million, were used to finance the purchase of the property by a joint venture between JDM Partners LLC and Transwestern Investment Group in a sale leaseback transaction from State Farm for a purchase price of approximately $930 million and total costs of $958.2 million (including closing costs and imputed equity). The trust note for the subject transaction consists of a $264 million participation in the whole loan with seven pari passu companion notes representing a total balance of $296 million held outside the trust. (DBRS Morningstar also rates two of the companion note CMBS transactions in GS Mortgage Securities Trust 2018-GS10 and Benchmark 2018-B4 Mortgage Trust.) The interest-only fixed-rate loan has a 10-year anticipated repayment date (ARD) in January 2028, after which the loan would hyper-amortize until the final maturity date in January 2033.

As of the December 2020 rent roll, the property remains 100% leased with State Farm accounting for 97.1% of the total net rentable area (NRA) and 98.0% of the total base rent. State Farm occupies space under several leases with varying expiration dates, only two of which, representing 434,000 sf (21.4% of total NRA), are during the loan’s full term; only one of those, representing 0.4% of the total NRA, has an expiration prior to the ARD. The Phoenix Business Journal reported in February 2021 that State Farm had subleased a portion of its space (representing 17.1% of the total NRA) to the Tempe-based online used car retailer Carvana; however, State Farm remains the direct tenant under the lease for that particular space (which includes no termination options) through December 2037, which is well past the loan’s final maturity date in January 2033.

As of the YE2020 financials, the servicer reported a net cash flow (NCF) of $53.2 million and a debt service coverage ratio (DSCR) of 2.63 times (x), an increase compared with the YE2019 NCF and DSCR of $52.3 million and 2.59x, respectively. DBRS Morningstar expects these figures to continue to grow given the contractual annual rent steps in the State Farm lease that DBRS Morningstar gave credit for in initially assigning the ratings.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), 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.

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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