DBRS Morningstar Confirms All Ratings on GS Mortgage Securities Corporation Trust 2019-GC40

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-GC40 issued by GS Mortgage Securities Corporation Trust 2019-GC40 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G-RR at B (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (high) (sf)
-- Class X-D at BBB (sf)
-- Class X-F at BB (high) (sf)

Additionally, DBRS Morningstar confirmed its ratings on the following rake bonds (the Rake Bonds), which are secured by the beneficial interest on the Diamondback Industrial Portfolio 1 (Prospectus ID#14) and Diamondback Industrial Portfolio 2 (Prospectus ID#1) loans that were defeased in 2022:

-- Class DB-A at AAA (sf)
-- Class DB-X at AAA (sf)
-- Class DB-B at AAA (sf)
-- Class DB-C at AAA (sf)
-- Class DB-D at AAA (sf)
-- Class DB-E at AAA (sf)
-- Class DB-F at AAA (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which continues to perform in line with DBRS Morningstar’s expectations since the last rating action. Despite increased risks for a select number of loans, overall credit metrics appear to be stable as evidenced by the historical occupancy rate and/or cash flow trends demonstrated over the last few reporting periods. DBRS Morningstar notes that there is a high concentration of loans collateralized by office properties, which represent 32.5% of the pool balance. While the market for office properties continues to be challenging, especially for assets in noncore, tertiary, or smaller metropolitan areas, DBRS Morningstar considered mitigating factors such as stable in-place occupancy; investment-grade, long-term tenancy; and potential stabilization timelines, as the majority of loans in the pool are not scheduled to mature until 2029.

As of the July 2023 remittance, all 35 of the originally securitized loans remain in the trust with an outstanding trust balance of $900.1 million, reflecting a collateral reduction of 1.2% since issuance. Four loans, representing 10.8% of the trust balance, are defeased. Eight loans, representing 21.6% of the trust balance, are on the servicer’s watchlist, primarily because of low debt service coverage ratios (DSCRs) and/or deferred maintenance. There are currently no loans in special servicing and no delinquent loans.

The second-largest loan, 101 California Street (Prospectus ID#4; 8.8% of the pool), is secured by the borrower’s fee-simple interest in a 1.3 million-square-foot (sf), Class A+, LEED Platinum office building in the heart of San Francisco’s financial district. Between 2012 and 2018, the sponsors invested about $96.3 million ($77 per square foot (psf)) in capital expenditures. As of YE2022, the loan reported a net cash flow (NCF) of $49.1 million and a DSCR of 1.58 times (x), down from the reported NCF and DSCR of $56.5 million and 1.81x, respectively, at YE2021 and $66.2 million and 2.10x at issuance. The decline in NCF is primarily attributed to the decreased occupancy and increased operating expenses since issuance. According to the rent roll dated March 31, 2023, the property was 75.6% occupied compared with 92.1% at the time of issuance. The former largest tenants, Merrill Lynch (previously 9.7% of the net rentable area (NRA)) and Cooley LLP (previously 8.0% of the NRA), vacated the building upon their lease expirations in 2022 and 2021, respectively. In 2021, Chime Financial (Chime) executed a 200,000-sf (16.0% of the NRA) 10-year lease at an average rental rate of $54.50 psf. Chime has since subleased 36,000 sf of its space; however, its direct lease is not scheduled to expire until 2032. According to a Q1 2023 Reis report, office properties in San Francisco’s North Financial District submarket reported a vacancy rate of 14.0% compared with the Q1 2022 vacancy rate of 12.5%. Near-term rollover risk is moderate, with leases representing 9.0% of the NRA scheduled to roll over in the next 12 months. Given the decline in DSCR and cash flow paired with soft submarket conditions, DBRS Morningstar analyzed this loan with a stressed loan-to-value (LTV) and probability of default (POD), resulting in an expected loss (EL) higher than the pool average.

Another pivotal loan of concern is Nitya Tower (Prospectus ID#12; 3.9% of the pool), secured by a 207,563-sf office building in Houston. The loan was added to the servicer’s watchlist in 2022 because of a decline in DSCR as well as occupancy concerns. According to the March 2023 rent roll, the property occupancy was 72.4%, down from 85% at the time of issuance. The three largest tenants include GSI Environmental Inc. (8.0% of the NRA; lease expiration April 2028), Sprott Newsom (4.8% of the NRA; lease expiration December 2027), and Houston Medical Records (4.3% of the NRA; lease expiration December 2029). Near-term rollover risk is moderate, with leases representing 17% of the NRA scheduled to roll through the end of 2024. The subject’s submarket has historically experienced high vacancy. According to a Q1 2023 Reis report, office properties in the Richmond submarket reported a vacancy rate of 24.5% compared with the Q1 2022 vacancy rate of 25.6%. The reported DSCR for the trailing nine months ended September 30, 2022, was 1.12x, down from the DBRS Morningstar DSCR of 1.65x derived at issuance. To reflect DBRS Morningstar’s concerns surrounding the property’s declining occupancy, declining cash flow, and soft submarket conditions, DBRS Morningstar analyzed this loan with a stressed LTV, resulting in an EL almost triple the pool average.

Adjustments were made for a select number of additional loans identified as having increased credit risks. As noted above, there is property type concentration, with 32.5% of the pool secured by office properties. DBRS Morningstar has a cautious outlook for this asset type. Increasing vacancy rates in the broader office market may challenge landlords’ efforts to backfill vacant space and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities. In addition to the two loans described above, DBRS Morningstar identified five more office loans, representing 20.6% of the pool, that are exhibiting increased credit risk from issuance, which is likely to persist in the near to moderate term given the continued uncertainty related to end-user demand and current macroeconomic headwinds. DBRS Morningstar applied stressed LTV ratios and, where applicable, increased the POD penalties for these loans.

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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-A, X-B, X-D, X-F, and DB-X are interest-only (IO) certificates that reference 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 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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

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.