DBRS Morningstar Confirms All Ratings on GS Mortgage Securities Corporation Trust 2020-UPTN

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2020-UPTN issued by GS Mortgage Securities Corporation Trust 2020-UPTN as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the underlying collateral. The collateral is nearly fully occupied with the three largest tenants—Salesforce, Inc. (Salesforce), Akin Gump Strauss Hauer & Feld LLP, and Weaver and Tidwell LLP—representing approximately 50.5% of the property’s base rent, and no other tenant represents more than 11.5% of base rent. In addition, the lease rollover is minimal, with 1.8% of the net rentable area (NRA) rolling before the end of the loan term.

The underlying loan is secured by the fee-simple interest in portions of The Union, a mixed-use complex in the Uptown/Turtle Creek submarket of Dallas, built in 2018. The overall development consists of four components—office, retail, parking, and apartments—all of which are individually structured as condominium units. The collateral for the loan consists of three condominium units including the 21-story LEED Gold-certified office building, a retail and restaurant cluster of three buildings surrounding an open courtyard, and a parking structure with three subterranean levels and six above-ground levels. The fourth, noncollateral, condominium unit is The Christopher, a 309-unit apartment building.

The five-year $222.0 million loan is interest only (IO) through the entire term, and there is no additional pari passu or subordinate debt. The sponsor, KB Asset Management Co., Ltd,. used the transaction to fund the collateral property’s acquisition and inject $163.5 million of cash equity. The property manager is the developer, RED Development.

According to the September 2022 rent roll, the property reported a total occupancy rate of 99.4%, with the office portion reporting an occupancy and average contractual rental rate of 99.2% and $37.63 per square foot (psf), respectively, and 100.0% and $47.50 psf, respectively, for the retail portion. At issuance, the office and retail portion was 95.2% and 100% occupied, with average contractual rental rates of $36.39 psf and $47.99 psf, respectively. The increase in contractual office rent is due to rent steps and the addition of several smaller tenants that have commenced leases at the property since issuance. The subject continues to operate above the Uptown submarket in terms of vacancy and rental rates. According to Reis, offices within the Uptown submarket reported average vacancy and rental rates of 25.2% and $32.80 psf, respectively, as of Q4 2022. Despite the submarket’s high vacancy, nonagricultural job growth will average 1.5% annually during 2023 and 2024, which will result in absorption averaging 471,000 sf per year, according to Reis. Retail properties within the submarket reported average vacancy and rental rates of 9.0% and $29.90 psf, respectively, as of Q4 2022.

The largest office tenant is Salesforce, which occupies 23.1% of the total NRA, paying a gross rental rate of $54.57 psf on a lease expiring in May 2025. The loan has a full cash sweep if Salesforce does not execute its first of two five-year extension options one year in advance of its May 2025 lease expiration, allowing for a reserve to be built above $6.0 million as of issuance. Salesforce reportedly spent more than $200 psf of its own capital to customize the space, a significant investment that would suggest a longer-term commitment to the property. According to a February 2, 2023, article from SFGate, Salesforce is moving forward in its plan to lay off approximately 10% of its workforce. Although the company had reportedly cut thousands of employees at its San Francisco and Ireland offices since the start of 2023, there have been no announcements to date that would materially affect the company’s workforce in Dallas. Three other large office tenants include Akin Gump Strauss Hauer & Feld LLP (14.6% of total NRA; lease expiring in September 2034), Weaver and Tidwell LLP (11.6% of total NRA; lease expiring in October 2030), and HBK Services LLC (8.6% of total NRA; lease expiring in November 2028).

Based on the year-to-date annualized net cash flow (NCF) ended September 2022, the NCF increased to $19.9 million (reflecting a debt service coverage ratio of 2.70 times), above the YE2021 and DBRS Morningstar NCF figures of $18.3 million and $17.1 million, respectively. The continued increase in cash flow growth during 2022 was primarily driven by increased rental revenue, increased parking income and expense reimbursements, and a decrease in utility costs. Given the long-term leases in place, the property’s above-average quality and desirable location, in addition to commitment from an institutional level sponsor, DBRS Morningstar expects loan performance to remain stable.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Class X-A is an 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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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