DBRS Morningstar Confirms All Ratings on GS Mortgage Securities Trust 2019-GC42

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-GC42 issued by GS Mortgage Securities Trust 2019-GC42 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since last review. At issuance, the transaction consisted of 36 fixed-rate loans secured by 94 commercial and multifamily properties with a trust balance of $1.06 billion. According to the January 2022 remittance report, all 36 loans remain in the transaction with no losses or defeasance to date. Collateral reduction as a result of scheduled amortization has been negligible, with a 0.5% decrease in the trust balance since issuance.

The transaction is concentrated with loans backed by office, retail and industrial property types, representing 36.2%, 23.0%, and 19.6% of the current trust balance, respectively. According to the January 2022 remittance report, one loan is in special servicing and 11 loans, representing 30.1% of the current trust balance, are on the servicer’s watchlist. These loans are on the watchlist for a variety of reasons, including low debt service coverage ratios (DSCRs), low occupancy rates, and tenant rollover concerns. However, the primary drivers are cash flow declines for retail and hospitality properties, which continue to suffer from sustained downward pressure on operational performance, stemming from ongoing disruptions related to the pandemic.

The largest loan on the servicer’s watchlist, 2 Cooper Square (Prospectus ID#3; 6.2% of the pool), is secured by the borrower’s leasehold interest in a 15-storey, 143-unit multifamily building with 21,848 square feet (sf) of retail space and a four-storey, 10-unit townhouse building in the Lower East Side of Manhattan. The loan was added to the servicer’s watchlist in July 2021 for a decline in DSCR, primarily attributed to an increase in expenses related to real estate property tax. According to the September 2021 financial reporting, the DSCR and occupancy rate were 1.62 times (x) and 97.9%, respectively. While the property has historically performed well, expenses linked to real estate property taxes will likely continue to increase due to an expiration of the 412A real estate tax abatement in 2022. However, the property benefits from its desirable location and relatively tight submarket vacancy rates, suggesting the asset will continue to perform well in the moderate to long term.

The only specially serviced loan, 114 Fordham Road (Prospectus ID#32; 0.7% of the pool), is secured by a 8,350-sf, two-storey retail property located in the Fordham Heights neighborhood of the Bronx. The loan transferred to the special servicer in April 2020 because of imminent monetary default as the only tenants that paid rent throughout the mandatory pandemic-related closures were the cell tower and billboard tenants. A forbearance was granted in the form of deferral of interest payments from August 2020 through December 2020, which was to be repaid over a period of 12 months starting with the January 2021 remittance cycle. Additionally, replacement and leasing reserves were deferred from May 2020 through June 2021 with repayment set to occur over a span of six months, beginning in July 2021. According to the servicer’s January 2022 reserve report, the borrower has replenished the replacement and leasing reserves, as outlined in the forbearance agreement.

According to the June 2021 rent roll, physical occupancy at the property was 100%. In addition, the financial statements for the trailing nine months ended September 30, 2021, showed an improvement in the DSCR to 1.77x, up from 1.07x at YE2020. Performance improvements were likely related to the reopening of retail stores and the resumption of in-person shopping. As of the January 2022 remittance, the loan remains current and with the special servicer. Moreover, the most recent (September 2021) appraisal value of $10.8 million exceeds the current trust exposure for this loan, providing a degree of cushion in the event of a liquidation. Given that the loan has exhibited relatively strong coverage for three continuous quarters, DBRS Morningstar expects it to be returned to the master servicer within the first quarter of 2022.

At issuance, DBRS Morningstar shadow-rated five loans—Moffett Towers II Buildings 3 & 4 (Prospectus ID#1; 6.2% of the pool), Woodlands Mall (Prospectus ID#6; 4.7% of the pool), Diamondback Industrial Portfolio (Prospectus ID#7; 4.7% of the pool), Hudson Yards (Prospectus ID#23; 1.9% of the pool), and Grand Canal Shoppes (Prospectus ID#24; 1.9% of the pool) — investment grade, supported by the loans’ strong credit metrics, strong sponsorship strength, and historically stable collateral performance. With this review, DBRS Morningstar confirms that the characteristics of these loans remain consistent with the investment-grade shadow rating.

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-A, X-B, and X-D are interest-only (IO) certificates that reference 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.

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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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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