DBRS Morningstar Downgrades Ratings on Seven Classes of GSCG Trust 2019-600C, Changes All Trends to Negative, Removes All Classes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) downgraded the ratings on seven classes of Commercial Mortgage-Pass-Through Certificated, Series 2019-600C issued by GSCG Trust 2019-600C as follows:

-- Class B (sf) to AA (sf) from AAA (sf)
-- Class C (sf) to A (sf) from AA (sf)
-- Class X (sf) to BBB (sf) from A (high) (sf)
-- Class D (sf) to BBB (low) from A (sf)
-- Class E (sf) to CCC (sf) from BBB (low)
-- Class F (sf) to CCC (sf) from BB (low)
-- Class G (sf) to CCC (sf) from B (low)

DBRS Morningstar also confirmed the rating on the following class:

-- Class A (sf) at AAA (sf)

All trends were changed to Negative from Stable.

As of this review, the transaction was removed from Under Review with Negative Implications where it had been placed on May 2, 2023, following the loan’s transfer to the special servicer as a result of payment default.

The rating downgrades and trend changes reflect the most recent appraised value and DBRS Morningstar’s recoverability outlook for the specially-serviced underlying loan, which is secured by an office property in San Francisco. The servicer obtained an April 2023 appraisal value that was made available with the July 2023 remittance and that figure represents a sharp decline from both the issuance appraisal and the DBRS Morningstar value derived when ratings were assigned in 2020 and suggests that, should the servicer ultimately take title to the property and liquidate the loan, losses could be realized up through the Class E certificate, supporting the downgrades to CCC (sf) for the three most junior classes in this transaction. When accounting for the as-is value decline for the collateral property, the loan-to-value ratio (LTV) sizing benchmarks suggested significant downgrade pressure across the stack, supporting the rating actions taken with this review.

The fixed-rate five-year $240.0 million loan is secured by a Class A, Leed Gold-certified office building totaling 359,154 square feet (sf) in the North Financial District of San Francisco. WeWork was the largest tenant in place at issuance, with more than 50% of the net rentable area (NRA), on a lease through March 2035. The sponsor, Ark Capital Advisors, LLC (Ark), is a joint venture among Ivanhoe Cambridge, the Rhone Group, and The We Company. The We Company (WeCo) is the owner of approximately 80% of Ark and is also the parent company of WeWork. At issuance, an affiliate of WeCo, We Work Companies, LLC, provided a guaranty in the amount of $44.1 million that was to remain in place through the duration of the WeWork lease.

The loan transferred to the special servicer in March 2023 and, as of the July 2023 remittance, it remains delinquent. The servicer reported that WeWork stopped paying rent and requested a lease modification from the borrower. WeWork is currently obligated to pay $87.91 per square foot (psf) per the terms of the lease. The rental rates for other tenants currently range between $61.00 psf and $86.00 psf. The special servicer reports negotiations remain ongoing regarding WeWork’s request for a lease modification, which DBRS Morningstar notes would likely also include an adjustment to the WeCo guaranty for the subject loan. The terms of the proposed modification reportedly include a space reduction for WeWork, a factor considered in the appraiser’s as-is value estimate as of April 2023. Given WeCo’s limited liquidity and its generally precarious financial position over the past several years, DBRS Morningstar did not give any credit to the guaranty provided as part of the analysis when ratings were assigned in 2020.

The April 2023 appraised value of $183.0 million implies an LTV of 131.1% and reflects a 52.4% decline from the issuance appraisal value of $370.0 million. This sharp decline in value is reflective of both the increased vacancy rate at the subject and the general distress of office properties in San Francisco, a market that has shown significantly higher stress compared with other major markets in terms of increased office attendance and overall leasing activity. Given that the loan is in default and the appraiser’s as-is value represents a more market-based valuation, DBRS Morningstar sized the trust loan based on the $183.0 million figure, maintaining negative qualitative adjustments to the final LTV sizing benchmarks to account for increased cash flow volatility and a positive qualitative adjustment to give credit to the better property quality. In total, these amounted to a qualitative adjustment of 0.50%. The resulting LTV sizing benchmarks indicated significant downgrade pressure throughout the capital stack.

Given the unknowns surrounding the lease modification for WeWork and the San Francisco office market in general, DBRS Morningstar also conducted a hypothetical liquidation scenario based on that same value to project where liquidated losses could be realized. As previously noted, the results of that analysis suggested losses could be realized through Classes E, F, and G, with approximately $23.3 million cushion remaining in Class E in that scenario. As of the July 2023 remittance, interest shortfalls totaling $674,430 were reported up through the Class E certificate. The special servicer is currently reporting a modification is in negotiation, but DBRS Morningstar maintains that, even if the loan is transferred back to the master servicer in the near to medium term, the risk to the trust remains significantly increased from issuance given the low as-is value and the appraiser’s expectation that stabilization would take at least three years to achieve.

According to the most recent financial reporting, the loan reported a YE2022 NCF of $16.7 million with a debt service coverage ratio (DSCR) of 1.72 times (x), which is unchanged from YE2021 but slightly below the YE2020 NCF of $17.4 million and DSCR of 1.79x. According to the July 2023 loan-level reserve report, $4.0 million were held across reserves, including $2.4 million in a replacement reserve and approximately $573,000 in other reserves. The servicer has also confirmed that, as of June 2023, the total balance of trapped cash is $1.2 million, which is currently in suspense while the cash management account is being set up.

The DBRS Morningstar ratings assigned to Classes B, C, and D are higher than the results implied by the LTV sizing benchmarks by three or more notches. The variances are warranted given the uncertain loan level event risk, which is compounded by the loan’s relatively recent transfer to special servicing and uncertainty surrounding the loan’s ultimate resolution. In addition, DBRS Morningstar notes that the hypothetical liquidation scenario considered as part of this review suggests liquidated losses would be contained to the Class E certificate (with a sizeable amount remaining in that Class), indicating considerable cushion for Class D and above should a liquidation be realized in the near to medium term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 https://www.dbrsmorningstar.com/research/416784 (July 4, 2023)

Class X 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 credit ratings are subject to surveillance, which could result in credit 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 the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

DBRS Limited
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023;
https://www.dbrsmorningstar.com/research/410191)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.