DBRS Morningstar Assigns Provisional Ratings to GS Mortgage Securities Corporation Trust 2022-GTWY

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates to be issued by GS Mortgage Securities Corporation Trust 2022-GTWY (GSMS Trust 2022-GTWY):

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

All trends are Stable.

The GSMS Trust 2022-GTWY transaction (The Strategic Gateway Hotel Portfolio) is an $811.0 million interest-only, floating-rate mortgage loan with an initial two-year loan term and three successive one-year extension options. The transaction is secured by the fee-simple interests in five gateway city luxury hotels totaling 3,390 keys across five states. The portfolio consists of two hotels operating under the InterContinental brand: InterContinental Chicago Magnificent Mile (792 keys) and InterContinental Miami (653 keys); one hotel operating under the Westin brand: The Westin St. Francis San Francisco (Westin St. Francis) (1,195 keys); one hotel operating under the JW Marriott brand: JW Marriott Essex House (528 keys); and one hotel operating under the Four Seasons brand: Four Seasons Hotel Washington, D.C. (222 keys). Both Westin and JW Marriott are subsidiaries of Marriott International. The properties were constructed between 1904 and 1982 and have all been renovated to various degrees over the past few years. The sponsor acquired the JW Marriott Essex House property in 2012 and the other four properties in 2005 and 2006.

DBRS Morningstar has a generally positive view on the collateral and believes the portfolio’s net cash flow (NCF) is sustainable and will continue to grow over the term of the loan considering that historical capital expenditure (capex) of $135.9 million, or $40,094 per key, was invested across the portfolio since 2015 and another $139.9 million, or $41,283 per key, is anticipated to be invested as part of the sponsor’s business plan over the next two years. An upfront capex reserve of $50.0 million will be escrowed at closing for this future renovation. While DBRS Morningstar views this non-property improvement plan (PIP) value-added renovation and upkeep of the hotel as a key element to sustain and enhance the hotel’s performance, there is no guarantee that the planned capex will be completed. DBRS Morningstar also views the sponsor-elected capex reserve as credit positive.

The portfolio demonstrated strong performance metrics prior to the onset of the Coronavirus Disease (COVID-19) pandemic, with 2019 weighted-average (WA) occupancy, average daily rate (ADR), and revenue per available room (RevPAR) penetration rates of 91.5%, 114.3%, and 104%, respectively. The 2018 WA occupancy, ADR, and RevPAR penetration rates were 96.5%, 112.8%, and 108.6%, respectively. The pandemic started in March 2020 and had a severe impact on the lodging industry, causing occupancy, ADR, and RevPAR to decline by unprecedented levels domestically and globally. Inevitably, the portfolio’s WA RevPAR in 2020 dropped 77.6% compared with 2019. In 2019, the portfolio averaged 72.7% occupancy and reported a WA ADR and RevPAR of $333.1 and $242.2, respectively. The portfolio weathered the storm well throughout the pandemic, remaining open and operational except for the temporary suspension of certain services and amenities to comply with local government mandates. In 2021, the portfolio reported a WA RevPAR of $102.5 based on a 34.8% WA occupancy and $294.7 WA ADR, demonstrating a strong recovery with an 89.3% increase in RevPAR from 2020. This also represents penetration rates of 98.2%, 109.8%, and 105.6% for WA occupancy, ADR, and RevPAR, respectively. The portfolio has continued to show improvement over the past few months, with the trailing-12-month (T-12) period ended February 28, 2022, demonstrating WA RevPAR of $115.6 based on 39.7% WA occupancy and $290.8 WA ADR. Individually, each of the five hotels has been a consistent and solid performer in its respective market and demonstrated RevPAR penetration exceeding or close to 100% pre-pandemic, from 2016 to 2019, compared with its competitive peers.

DBRS Morningstar’s concluded NCF and value for the portfolio reflect a stabilized occupancy assumption of 72.7%, which is well above the portfolio’s 39.7% occupancy for the T-12 period ended February 28, 2022. However, this occupancy represented the 2019 pre-pandemic occupancy level, reflecting the portfolio performance right before the pandemic began. In addition, from 2015 to 2019, the portfolio exhibited an average annual occupancy of 78.6%, and this included various renovation periods for four of the five hotels, which somewhat affected the occupancy rate. DBRS Morningstar elected to stabilize the portfolio and assumed occupancy in line with its pre-pandemic performance given the best-in-class brand affiliation and quality of the properties, locations in high-barrier-to-entry gateway markets, and the sponsor’s experienced management/sponsorship. Although certain assets in the portfolio that are more reliant on business and group demand experience a slower recovery, others that are more focused on transient customers continue to see rapid improvement. While occupancy has declined, the sponsor has been successful in maintaining ADR during the pandemic and, for a number of properties, has been able to increase rates above their pre-pandemic highs, which has somewhat mitigated the impact of the pandemic on portfolio RevPAR. The Four Seasons Hotel Washington, D.C.; JW Marriott Essex House; and InterContinental Miami (which together represent approximately 53.8% of the allocated loan amount (ALA)) have benefited from increased leisure business, increased domestic travel as a result of international restrictions, and pent-up demand from lockdowns. Additionally, these hotels offer tourism appeal because of their luxurious amenities and gateway city locations. These demand drivers were reflected in an increase to ADR, while occupancy remained affected by the pandemic. DBRS Morningstar assumed a stabilized ADR similar to the 2019 level of $333.12, about 15% higher than the actual ADR for the T-12 period ended February 28, 2022, considering the demand segmentation at the hotels will likely normalize when group and business demand resume. Based on a stabilized occupancy of 72.7% and an ADR of $333.12, DBRS Morningstar concluded a RevPAR of $242.15. This RevPAR represents approximately 110% lift from the RevPAR for the T-12 period ended February 28, 2022. However, this RevPAR was achieved before the pandemic hit and is also in line with the five-year average RevPAR from 2015 through 2019.

Overall, DBRS Morningstar believes that the portfolio can achieve a RevPAR close to the 2019 pre-pandemic level or better in the near future given the recent uptick in RevPAR across the portfolio and considering the local markets and their current states of recovery from the pandemic. On a rolling T-12 basis, the portfolio NCF has steadily increased to -$1.4 million for the T-12 period ended February 28, 2022, from -$81.1 million for the T-12 period ended March 31, 2021. In addition, DBRS Morningstar expects the RevPAR to increase following the completion of the planned renovation in 2022/2023. The transaction sponsor is an affiliate of Strategic Hotels & Resorts (Strategic). Since 2019, Strategic has made meaningful leadership and strategic changes to shift the focus from a market-agnostic focus on rate to a market-driven approach that capitalizes on each asset’s market positioning. Before that and under prior management, the focus had been on prioritizing ADR over occupancy, which drove the decline in occupancy through 2019. Despite the declining occupancy to 73% in 2019 from 83% in 2015, the portfolio RevPAR remained relatively stable around $245 between 2015 and 2019 because of the ADR increasing to $333 in 2019 from $294 in 2015. The new business strategy also includes offering creative themed programs and other initiatives to draw demand from various guest bases, especially during low seasons to fill in the gaps, and optimizing the use of the hotels. In particular, the business strategies implemented at InterContinental Miami, JW Marriott Essex House, and Westin St. Francis have helped to stabilize penetration indexes since the change in leadership.

The loan has a moderate DBRS Morningstar issuance loan-to-value ratio of 68.6%, which increases the term and balloon risks. The DBRS Morningstar debt service coverage ratio (DSCR) is 2.57 times (x) based on one-month Term Secured Overnight Financing Rate (SOFR) of 0.60% per annum plus an assumed initial WA component spread of approximately 3.53%. Based on the strike rate of 3.5% plus 3.53% spread, DBRS Morningstar's DSCR will be 1.51x. The high land values at these prime gateway cities somewhat mitigate the high leverage in this loan. The portfolio’s total land value is $712.8 million, representing about 87.9% of the loan amount. The hotels are in DBRS Morningstar Market Ranks 6, 7, and 8 with a WA of 7.6, which is indicative of highly liquid, urban markets. These markets generally benefit from increased liquidity that is driven by consistently strong investor demand and therefore tend to benefit from lower default frequencies than less-dense suburban, tertiary, or rural markets. In addition, the loan is structured with a 12-month debt service reserve (DSR) that should be sufficient to cover any ongoing operating losses from depressed RevPAR. DBRS Morningstar found all five properties it toured to be well run and maintained, in keeping with the high expectations of travelers staying at a luxury property. A number of the properties have also clearly benefited from their drive-to locations during the pandemic and have successfully shifted their yield strategy from group and convention business to leisure travelers. Overall, DBRS Morningstar believes that as the pandemic continues to abate, demand segmentation normalizes, and international and business travel returns, the portfolio should revert to a level of RevPAR consistent with its observed historical performance.

The portfolio is a collection of five AAA Five Diamond and Four Diamond world-class luxury hotels within the premier global gateway markets in Washington, D.C.; New York; Miami; Chicago; and San Francisco. Each hotel is close to the largest corporate and leisure demand drivers in its respective market. The portfolio consists of 3,390 keys and features high-end finishes and amenities including restaurant concepts by Michelin-starred chefs, various sizes of event spaces, fitness clubs, and opulent spa facilities. DBRS Morningstar assigned a property quality grade of Average +, Above Average, or Excellent to each of the collateral properties.

The properties benefit from strong affiliations with leading luxury hospitality brands including Four Seasons, Marriott International, and InterContinental Hotels Group. Two hotels (1,445 keys) operate under the InterContinental brand family, one hotel (1,195 keys) operates under the Westin brand family, one hotel (528 keys) operates under the JW Marriott brand family, and one hotel (222 keys) operates under the Four Seasons brand family.

The portfolio demonstrated strong performance metrics prior to the onset of the pandemic, with 2019 WA occupancy, ADR, and RevPAR penetration rates of 91.5%, 114.3%, and 104%, respectively. The 2018 WA occupancy, ADR, and RevPAR penetration rates were 96.5%, 112.8%, and 108.6%, respectively. Although average occupancy and ADR declined from 2019 to 2021 during the pandemic, February 2022 year-to-date WA RevPAR penetration for the portfolio was approximately 126%, higher than the 104% in 2019. On a rolling T-12 basis, the portfolio NCF steadily increased to -$1.4 million for the T-12 period ended February 28, 2022, from -$81.1 million for the T-12 period ended March 31, 2021. Furthermore, the portfolio has demonstrated favorable forward bookings, with next-year bookings at approximately 68% of pre-pandemic levels, led by the InterContinental Miami and Westin St. Francis.

The sponsor has invested approximately $135.9 million, or $40,094 per key, in capex across the portfolio since 2015. Between 2015 and 2021, approximately $105.8 million, or $31,200 per key, was invested in guest room renovations and conversions. The sponsor plans to spend another $139.9 million, or about $41,283 per key, in capex across the portfolio in 2022 and 2023 and $50.0 million has been reserved upfront.

The transaction benefits from additional cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 1.21 by ALA, which is below other recent DBRS Morningstar-rated multi-property portfolios but still provides favorable diversification of cash flows when compared with a single asset.

The property benefits from experienced, institutional-quality sponsorship in Strategic. Founded in 1997, Strategic currently owns and manages 15 luxury hotels across North America and Europe. Strategic employs brand-specific hotel management companies to operate its management contracts and operating leases. Previously, Strategic was publicly traded on the New York Stock Exchange under the ticker BEE and was subsequently acquired by AB Stable VIII, LLC (AB Stable), an indirect subsidiary of Anbang Insurance Group Co., Ltd. (Anbang), excluding the Hotel del Coronado. The borrower sponsor is under common control with Anbang, the predecessor to the borrower sponsor, as owner of the borrowers.

An upfront debt service reserve will be escrowed at closing in an amount equal to approximately $46.9 million, representing 12 months of the monthly debt service payment (using the forward Term SOFR curve for the next 12 months). In addition, the loan document is expected to be structured with a capex reserve in the amount of approximately $50.0 million, which represents approximately 35.7% of the anticipated non-PIP planned renovations for 2022 and 2023, which DBRS Morningstar views as credit positive.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types, creating a substantial element of uncertainty around the recovery of demand in the hospitality sectors, even in stronger markets that have historically been highly liquid. As a result of the pandemic, occupancy and RevPAR across the portfolio declined to 34.8% and $102.45 as of YE2021 from 72.7% and $242.15 as of YE2019. The hotels have remained open and operational except for the temporary suspension of certain services and amenities to comply with local government mandates throughout the pandemic. All debt service associated with the properties’ existing financing is current and there have been no requests for forbearance. The loan is structured with a 12-month DSR.

DBRS Morningstar’s NCF and value reflects a RevPAR of $242.15, which is the 2019 pre-pandemic level of performance. This RevPAR represents approximately 110% lift from RevPAR for the T-12 period ended February 28, 2022. However, it is in line with the five-year average RevPAR from 2015 through 2019. DBRS Morningstar elected to stabilize the portfolio and assumed occupancy and ADR in line with its pre-pandemic performance given the best-in-class brand affiliation and quality of the properties, strong operating history, locations in high-barrier-to-entry core markets, and the experienced in-place management teams and Strategic’s strong sponsorship. DBRS Morningstar accounted for this stabilization risk by applying a penalty to its qualitative adjustments.

Three properties (JW Marriott Essex House, InterContinental Chicago Magnificent Mile, and Westin St. Francis) all recorded negative NCF at YE2021. These properties are primarily reliant on group and business demand, which has been significantly affected by the pandemic and is one of the slowest sectors to recover. Collectively, these three properties represent 66% of ALA. The loan is structured with a 12-month DSR that helps alleviate some ongoing operating losses at these properties. In addition, DBRS Morningstar expects the NCF to increase following the completion of the planned renovation in 2022/2023. Strategic’s new management philosophy, implemented in August 2021, targets a balanced last-dollar approach to managing occupancy and room rate versus rate only, and revamping shoulder-season rate strategy would help mitigate this concern as well.

Approximately 31% of the portfolio’s total revenue is derived from food and beverage (F&B) sales. F&B income generally experiences greater volatility than income generated from room sales, given the lower-margin nature of the revenue stream. However, a large portion of this revenue has historically come from more stable and predictable banquet and catering sales as opposed to room service and restaurants. In addition, the restaurants at a number of the properties have a strong local following because of their celebrity chef affiliations, which also helps shield this revenue stream from transient demand fluctuations.

The sponsor is partially using proceeds from the loan to repatriate approximately $32.9 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings because sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-is valuation of $2.19 billion, the sponsor will have approximately $1.4 billion of unencumbered market equity remaining in the transaction.

Three properties were identified with recognized environmental concerns in the Phase I Environmental Site Assessment reports where Phase II reports are recommended. A Phase II subsurface investigation is recommended for the InterContinental Chicago Magnificent Mile property for potential soil and groundwater contamination beneath the site due to the historical use of the adjacent property for dry cleaning and generation of chlorinated solvent wastes. A Phase II subsurface investigation is recommended for the Four Seasons Hotel Washington, D.C. for potential soil and groundwater contamination affected by potential releases associated with the 30,000-gallon fuel oil underground storage tank (UST) and the dry cleaning activities with generation of chlorinated solvent wastes. A Phase II subsurface investigation is recommended for the Westin St. Francis to assess the presence or absence of subsurface impacts as a result of the existing 2,500-gallon UST and abandoned-in-place 4,000- and 4,500-gallon diesel USTs and to evaluate the tetrachloroethylene release to soil gas associated with former dry cleaning operations. The probable maximum estimate of the remediation costs totaled $1,763,245 for all three properties. There is no reserve for the remediation costs in place; however, an environmental liability insurance and environmental indemnity are in place per the loan agreement.

On April 27, 2020, AB Stable, an indirect subsidiary of Dajia Insurance Group Co., Ltd. (Dajia), successor as indirect owners of the borrowers to Anbang, filed suit in the Delaware Court of Chancery against MAPS Hotels and Resorts One LLC (MAPS). MAPS is an indirect subsidiary of Mirae Asset Financial Group. The purpose of the lawsuit was to compel specific performance of MAPS obligations under a sale agreement pursuant to which MAPS had agreed to acquire all of the member interests in Strategic, covering indirect ownership in 15 hotel properties, from AB Stable for a total purchase price of $5.8 billion. The Delaware Court of Chancery ruled that MAPS was not obligated to close and had properly terminated the sale agreement. AB Stable has appealed to the Delaware Supreme Court, and that appeal remains pending. The mortgage loan agreement recourse carveouts for losses include litigation costs arising out of or incurred in connection with any litigation or dispute relating to the transfer of ownership or control of or encumbrance of any property or ownership or control of Anbang or its subsidiaries while such entity is or was the direct or indirect owner of any interest in any property, in any such case in connection with or relating to the existing title endorsement matter.

On October 29, 2020, one individual and several entities filed a putative class action lawsuit in the United States District Court for the District of Columbia against certain members of the Chinese Communist Party (CCP), the Chairman of Dajia, the CCP Branch for Baoshan Prison, AB Stable, a Vice Chancellor of the Delaware Court of Chancery, and a Delaware attorney that had represented Dajia before the Delaware Court of Chancery. The complaint alleges that the plaintiffs are owners of Anbang, and that defendants engaged in a wide-ranging conspiracy with the CCP to expropriate Anbang through various unlawful means. The complaint alleges that Anbang, an insurance company founded in the People’s Republic of China (according to the complaint), was illegally nationalized by the CCP, through a Chinese state-owned fund, allegedly on the basis of Anbang’s insolvency. The plaintiffs filed several motions seeking to restrain Anbang’s rights with respect to certain properties, including by placing those properties under receivership. Defendants AB Stable and the Delaware Vice Chancellor and Delaware Attorney all filed motions to dismiss the complaint (the remaining defendants are located in China and have not been served), and AB Stable opposed the motions to appoint a receiver and for other injunctive relief. On August 27, 2021, the Court granted each of the motions to dismiss and denied the plaintiffs’ motions to appoint a receiver and for other injunctive relief. Plaintiffs responded by filing a motion for the court to reconsider its previous decision to dismiss the claims, and also filed a motion demanding the presiding judge recuse himself from the case. The court has not yet responded to these motions. In December 2021, the court (on its own initiative) entered an order to show cause (i) asserting that it appeared plaintiff’s counsel has been engaged in a fraud upon the court, and at the very least has submitted frivolous filings with an intent to harass defendants and (ii) ordering plaintiffs and their counsel to explain why they should not be sanctioned and the whole case should not be dismissed with prejudice. The court has not taken further action to dismiss the remaining charges or issue sanctions against plaintiffs or their attorneys. Currently, the only remaining defendants in the action are those located in China. Plaintiffs requested and were granted additional time to effect service on these foreign defendants. However, in March 2022, a letter was filed with the court from the Ministry of Justice of the People’s Republic of China declining to accept service of process on behalf of those defendants.

The Mortgage Loan Agreement recourse carveouts for losses include litigation costs arising out of or incurred in connection with any litigation or dispute relating to the transfer of ownership or control of or encumbrance of any Property or ownership or control of Anbang or its subsidiaries while such entity is or was the direct or indirect owner of any interest in any Property, in any such case in connection with or relating to the Existing Title Endorsement Matter as more fully described in the Offering Circular.

The nonrecourse carveout guarantor for the loan is Strategic Hotel Funding, L.L.C., which is required to maintain a minimum net worth of at least the greater of (a) 40% of the then-outstanding principal balance of the Mortgage Loan and (b) $300 million; and a liquidity of $25 million. ”Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, physical waste, and other potential bad acts of the sponsor.

The loan is structured with recycled special-purpose entities (SPEs). The borrowers have given backward-looking representation, from the date of the SPE’s formation, that it does not carry any prior liabilities. Additionally, if the borrower’s SPE representations are breached, a guarantee from the sponsor is triggered.

There are no performance triggers, financial covenants, or fees required for the borrower to exercise the two one-year extension options. The options are exercisable by the borrower, subject only to compliance with the following conditions: (1) at least 30 days prior written notice to lender, (2) no event of default existing as of the commencement of the applicable extension term, (3) borrower’s purchase of a cap agreement for each extension term, and (4) reimbursement of lender and servicer’s reasonable third-party out-of-pocket costs and expenses incurred in connection with processing and documenting the extension option.

The debt yield’s trigger for the cash flow sweep event is low at 4.5% (or 5.0% during the first extension term and 6.0% during the second extension term), which increases the term and balloon default risks.

The underlying mortgage loan for the transaction will pay a floating rate indexed to Term SOFR. However, if upon the sunsetting of Libor Term SOFR does not survive in its current form or if a different benchmark replacement is chosen, the loan could be subject to potential benchmark transition risk. Given that Term SOFR is a relatively new rate, there is the potential for higher volatility in the near term than other indexes. If Term SOFR is no longer available as a benchmark and no other benchmark replacement is able to be determined, it will be replaced with the Prime Rate indexes.

This securitization transaction will be subject to the credit risk retention requirements of Regulation RR, 12 C.F.R. Part 244. An economic interest in the credit risk of the mortgage loan is expected to be retained as an eligible horizontal residual interest in the form of the Class HRR Certificates. Franklin HRR CMBS Holdings, LLC is expected to purchase the Class HRR Certificates, and Franklin ELP Holdings, LLC, and an affiliate of Franklin HRR CMBS Holdings, LLC, is expected to retain 100% of the Class ELP Certificates.

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.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (February 28, 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 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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