DBRS Morningstar Confirms Ratings of GB Trust 2020-FLIX

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-FLIX issued by GB Trust 2020-FLIX (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class X-CP at A (sf)
-- Class X-NCP at A (sf)
-- Class X-FP at A (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 certificate. The CAST certificates can be exchanged for other classes of CAST certificates and vice versa, as described in the rating report for this transaction.

The rating confirmations reflect the stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. The trust loan is a five-year (two years plus three one-year extensions), floating-rate, interest-only mortgage loan with an outstanding principal balance of $900 million secured primarily by the borrowers’ fee simple and/or leasehold interests in four office properties and three studio facilities in Los Angeles. While not contiguous with each other, the properties come together to form a synergistic creative campus in Hollywood that has been a draw for tenants in the content creation space.

The office component comprises four buildings totaling approximately 837,000 square feet (sf), three of which, ICON, CUE, and EPIC, were fully leased to Netflix at issuance. These buildings were built in 2016, 2017, and 2020, respectively. 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. (Technicolor), which has been at the property since 2008. Technicolor leases the entire building through 2032, though the lease has a termination option in May 2027, which requires a minimum of 12 months' notice and a termination penalty exceeding $6.3 million.

The studio component of the portfolio comprises three studio properties totaling approximately 1.2 million sf, 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 for 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, the American Broadcasting Corporation (ABC), KTLA, Disney, and CBS/Viacom. The studio properties feature a campus-like setup with gated entry.

At issuance, the property known as Sunset Gower Studios, which represents 514,000 sf of the studio component, had two expansion projects that were preapproved by the lender: (1) construction of additional office space as well as below-grade parking, which will entail demolition of some existing structures and (2) replacement of existing site infrastructure (electrical, storm, water, telecommunications, etc.) running throughout the studio lot. DBRS Morningstar located articles online as of November 2020 that reported the Los Angeles City Planning Commission had approved plans by the sponsors to add approximately 480,000 sf in additional improvements, including two soundstages, a high-rise office tower, and a low-rise building for office and production support staff. According to a November 9, 2020 article by the Los Angeles Business Journal, “The project, which is being designed by Gensler, is expected to take three years to build and will likely start construction in 2022.” Based on interviews with Alex Vouvalides (then chief investment officer and chief operating officer of Hudson Pacific Properties L.P.), the article also noted that “Netflix has been a big preleaser of other Hudson Pacific buildings,” (including the EPIC office property) and that the buildings could have a tenant before construction is completed.

At issuance, DBRS Morningstar analyzed a net cash flow (NCF) of $81.2 million, with a variance of -6.6% when compared with the Issuer’s underwritten NCF of $87.0 million. The variance is largely attributable to DBRS Morningstar’s higher capital expenditures and tenant improvement/leasing commission assumptions on both components of the portfolio, but especially the office component. Given the recent vintage of the transaction, the servicer has not provided updated annual financials to date, including a property rent roll.

As of the July 2020 rent roll provided at issuance, the total portfolio was 92.1% leased, with the office component 100% leased to two tenants, and the studio component 87.4% leased to a much more granular tenant roster with only five tenants leasing more than 3% of the studio component’s net rentable area (NRA). The largest overall tenant is Netflix, which occupies 53.9% of the portfolio’s NRA across both the office and studio components on various leases, though the entire office footprint (86% of office NRA) expires past loan maturity, in September 2031. The second-largest tenant is ABC, which occupies 10.8% of the total NRA and is entirely concentrated in the studio component, on leases that were scheduled to expire in May and June 2021. The third-largest tenant is Technicolor, which again, occupies a mixture of the remainder of the office component and a small portion of the studio component’s support space, representing 6.8% of the total portfolio’s NRA, with the office lease (5.6% of total NRA) expiring in May 2032. No other tenant represents more than 5% of the total portfolio’s NRA.

DBRS Morningstar notes moderate rollover is scheduled through June 2021, with 24.2% of the total portfolio NRA on month-to-month leases or leases scheduled to expire by that date. The second-largest tenant, ABC, represented the majority of the rolling space, with 10.8% of NRA expiring by June 2021. To date, DBRS Morningstar has not received confirmation of the lease renewal status for ABC, which uses the location to film the “Station 19” television show, which was renewed for a fifth season in May 2021. All of the rollover risk is concentrated in the studio component, with the remaining 13.4% of expiring NRA spread out among 58 tenants averaging less than 0.2% of NRA.

The portfolio has strong sponsorship. The borrowers are special-purpose entities that are owned 50.1% by Hudson Pacific Properties L.P. and 49.9% by one or more entities indirectly owned and controlled by the real estate investment fund commonly known as Blackstone Property Partners. The nonrecourse carveout guarantors are Blackstone Property Partners Lower Fund 1 L.P. and Hudson Pacific Properties L.P.

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.

Classes X-CP, X-NCP, X-FP, and A-IO are interest-only (IO) certificates that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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 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 methodology is the 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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