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

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

-- 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 given the fact the collateral property is nearly fully leased to an investment-grade tenant on a long-term lease that has staggered expiry dates that begin in 2032. The collateral is a first-lien mortgage on the borrower’s leasehold interest in the property known as Marina Heights State Farm, a 2.0 million square-foot (sf) suburban office complex in Tempe, Arizona, that consists of five Class A buildings and two retail buildings. Completed between 2016 and 2017, the property was built by State Farm Mutual Automobile Insurance Company and its affiliates (collectively, 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’s office operations, including a call centre, 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. Because the ground lessor is a tax-exempt government agency, the property is exempt from property taxes.

Whole loan proceeds of $560.0 million, along with $375.7 million of cash and an imputed equity contribution of $22.5 million, financed the purchase of the property by a joint venture between the loan sponsors, JDM Partners LLC and Transwestern Investment Group, in a sale leaseback transaction from State Farm for a purchase price of approximately $930.0 million and total costs of $958.2 million (including closing costs and imputed equity). The trust note for the subject transaction consists of a $264.0 million participation in the whole loan with seven pari passu companion notes representing a total balance of $296.0 million held outside the trust. DBRS Morningstar also rates two of the companion note commercial mortgage-backed securities 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 2021 rent roll, the property was 99.9% occupied, with State Farm accounting for 97.1% of the total net rentable area (NRA), consistent with reporting since issuance. State Farm occupies space under several leases with varying expiration dates. Two of the leases, represent a combined 434,000 sf (21.4% of the total NRA), are scheduled to expire during the loan’s full term; only one of those, representing 2.3% of the total NRA, has an expiration prior to the ARD.

The Phoenix Business Journal reported in December 2021 that State Farm had subleased a portion of its space to the online used car retailer Carvana, with the square footage cited in the article suggesting the space represented approximately 17.0% of the total NRA across the office complex. DBRS Morningstar has confirmed with the servicer that this sublease was executed; however, the full terms of the sublease, including confirmation of the square footage, have not been received to date. State Farm has been in the news recently for announcing plans to reduce its physical footprint and allow for more remote and hybrid work structures for its employees. A January 2022 news report by ABC15 Arizona stated State Farm was looking to hire 1,000 workers for the Tempe area, with the story noting these employees would spend approximately 80% of the month remote, with the remaining 20% at the subject campus. Although these trends are noteworthy, DBRS Morningstar does not believe they suggest significantly increased risks for the subject transaction given the long-term lease structure for State Farm, as well as the ARD structure, which will require a hastened paydown of the principal balance if the loan is not repaid by that date.

The YE2021 financials showed a net cash flow (NCF) of $54.6 million, equating to a debt service coverage ratio (DSCR) of 2.70 times (x), up from the YE2020 NCF figure of $53.2 million and DSCR of 2.63x, primarily driven by scheduled rent escalations. DBRS Morningstar expects these figures to continue to grow given the contractual annual rent steps in the State Farm lease that were included in the DBRS Morningstar NCF figure of $55.7 million at issuance.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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.

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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