DBRS Morningstar Confirms Ratings on GS Mortgage Securities Corporation Trust 2017-375H

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), issued by GS Mortgage Securities Corporation Trust 2017-375H:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since DBRS Morningstar’s last review. The collateral is a first-mortgage loan on 375 Hudson Street, which is secured by the borrower’s leasehold interest in a 19-story, Class A LEED Gold-certified office building located between West Houston Street and King Street in the Hudson Square area of New York City. The property comprises 1.1 million square feet (sf) of rentable area, which is primarily configured for office use and includes a parking garage. The ground lease had an initial 93-year term and expires in August 2110. The annual base rent payment due under the ground lease is $0 for the entire term. The loan is structured as a 10-year, $400 million, interest-only (IO) loan that matures in September 2027. In addition to the loan proceeds, the sponsors, as a group, contributed equity of $465.0 million to purchase the $865 million leasehold interest. The sponsors of the loan are a joint venture involving The Rector, Church-Wardens and Vestrymen of Trinity Church in the city of New-York (Trinity); an affiliate of Norges Bank Real Estate Management (Norges); and an affiliate of Hines Interests Limited Partnership. Trinity has owned the land for more than 200 years.

At issuance, the two largest tenants were Saatchi & Saatchi (63.7% of the net rentable area (NRA)) and Penguin Random House (Penguin) (27.4% of the NRA). In 2019, Penguin terminated its lease, ahead of its original lease expiration in March 2025. As part of the lease termination, Penguin agreed to pay a termination fee in the amount of $47.6 million, consisting of an initial lump sum of $28.5 million, followed by monthly payments of $331,000 to be paid between 2019 and 2024. As of the March 2022 reporting, $20.8 million was being held in reserves by the servicer. In August 2019, Lion Resources, a subsidiary of Publicis Groupe, and an affiliate of Saatchi & Saatchi, was signed to back-fill the former Penguin space and also take over the Saatchi & Saatchi space, with the lease running through 2043. Publicis Groupe is the parent of the guarantor on the lease, MMS USA Holdings, Inc., and is a global marketing and communications firm that, as of the date of this press release, carries investment grade ratings by S&P Global Ratings and Moody’s Investors Service of BBB (with stable outlook) and Baa2 (with stable outlook), respectively.

For the expansion into the former Penguin space (floors two through five), Lion Resources was granted an initial rent abatement through November 2020, with a reduced rental rate of $25 per square foot (psf) before increasing to $41.50 psf in April 2025, where it will remain through the end of the lease term in 2043. Lion Resources occupies 89.5% of the total NRA of the property, with one other tenant in place in Turner Construction Company, which occupies 73,297 sf or 6.7% of the NRA of the property.

As of December 2021, the property was 99.0% occupied with the office portion of the property fully occupied. The South Broadway submarket remains one of the most desirable office submarkets in New York Metro because of its high-quality office buildings. According to Q4 2021 data from Reis, the submarket reported an overall vacancy rate of 8.2% with average asking rents of $64.47 psf and effective rents of $55.96 psf, notably above the subject’s average rental rate of $40.69 psf. Rent has risen in every month since December 2020 in the South Broadway submarket. Reis forecasts the submarket vacancy rate to finish at 6.2% by YE2022 and will rise 0.2% to 6.4% by year end 2023.

As of the year-end 2021 financials, the servicer reported a net cash flow (NCF) of $41.8 million, with a debt service coverage ratio (DSCR) of 2.95 times (x) and an occupancy rate of 99.0%, which compares with the Issuer’s $43.7 million NCF and 3.09x DSCR. While the DSCR has declined since issuance, these trends have been the result of the lower in-place rental rate for the primary tenant at the property, with cash flows expected to increase significantly when that period expires approximately two years prior to the loan maturity date. The sizable reserve in place as a result of the Penguin lease termination is also a noteworthy risk mitigant for this loan.

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.

Class X-A is an interest-only (IO) certificate 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 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 4, 2022), 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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