DBRS Morningstar Confirms All Ratings on GS Mortgage Securities Corporation Trust 2017-375H, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-375H issued by GS Mortgage Securities Corporation Trust 2017-375H:

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

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

Loan proceeds of $400.0 million financed the $865.0 million acquisition of the leasehold interest in a 19-story, Class A LEED Gold-certified office building located at 375 Hudson Street in the Hudson Square market of Manhattan in New York. The property consists of 1.0 million square feet (sf) of office space (94.6% of net rentable area (NRA)); 39,754 sf of storage space (3.7% of NRA); and 14,004 sf of retail (1.3% of NRA) for a total of 1.1 million sf. At issuance, the property was primarily occupied by three tenants, representing 98.3% of NRA, including Saatchi & Saatchi North America, Inc. (Saatchi & Saatchi) (63.7% of NRA), Penguin Random House (27.4% of NRA), and The Turner Corporation (7.2% of NRA). Saatchi & Saatchi has been a tenant at the subject since it was constructed in 1987. At issuance, DBRS Morningstar noted that Penguin Random House was set to vacate its space in early 2019 prior to its lease expiration in March 2025, and intended to sublease the space during that period.

In June 2019, the sponsor and Penguin Random House agreed to a lease termination for a total fee of $47.6 million. An initial $28.5 million will be funded by the tenant in 2019, and the remaining balance will accrue annually until 2024. Simultaneously, the borrower entered into a new lease agreement with Saatchi & Saatchi to expand into the former Penguin Random House space and to extend the term of its current leased space. As a result, all leases at the property are coterminous in January 2043. Additionally, MMS USA Holdings, Inc., a 100% subsidiary of Publicis Groupe S.A. (an investment-grade entity), provides a full corporate guaranty to the Saatchi & Saatchi lease throughout the term. Termination proceeds from Penguin Random House were deposited into a servicer-controlled escrow account and funds may be used for tenant improvement (TI) and leasing commissions (LC) related to the new Saatchi & Saatchi leases. TI work for the expanded and current Saatchi & Saatchi office space is scheduled to be finished in the first half of 2020 and is expected to total $74.9 million, or $78 per sf (psf).

Saatchi & Saatchi will occupy approximately 89.5% of NRA and the subject now effectively operates as a single-tenant property. Based on the December 2019 rent roll, the property was 97.0% occupied compared with the 99.3% occupancy rate at issuance. Saatchi & Saatchi received full rent abatements for the expanded space beginning in August 2019 and ending in November 2020. Once rent abatements expire, Saatchi & Saatchi will begin paying $25 psf in base rent, which is well below market rates of $69 psf, per a Q4 2019 Reis report for the South Broadway submarket. Rent escalators are scheduled for January 2023 for the current Saatchi & Saatchi leased space and March 2025 for the expanded Saatchi & Saatchi space and are both projected to remain below market. Although base rents will be below market for the foreseeable future, the collateral will benefit from stable revenue generated from a long-term credit tenant well beyond loan maturity.

The loan reported a YE2019 DSCR of 2.73 times (x), down from the YE2018 DSCR of 3.23x and the YE2017 DSCR of 3.18x. Because of the recent leasing developments, DBRS Morningstar calculated a new DBRS Morningstar net cash flow (NCF), which was used for the subject review. DBRS Morningstar credited the Saatchi & Saatchi space for vacancy losses and TI/LC reserves given the long-term credit tenant status. The updated DBRS Morningstar NCF of $36.8 million, resulting in a DSCR of 2.66x, is slightly lower than the DBRS Morningstar NCF of $37.6 million derived at issuance. In the near term, DBRS Morningstar expects NCF to be weakened because of the scheduled rent abatements; however, cash flow is expected to rebound and remain stable in 2021 and throughout the remaining loan term thereafter.

In the analysis for these rating actions, the DBRS Morningstar NCF figure of $36.8 million derived from part of the September 2019 DBRS Morningstar surveillance review and a cap rate of 7.0% was applied, resulting in a DBRS Morningstar Value of $526.3 million, a variance from the appraised value of $1,050 million. The DBRS Morningstar Value implies an LTV of 76.0%, as compared with the LTV on the issuance appraised value of 38.1%.

The NCF figure applied as part of the analysis represents a 15.7% variance from the Issuer’s NCF, primarily driven by gross potential rent. As of YE2019, the servicer reported a NCF figure of $38,724,699, a +5.0% variance from the DBRS Morningstar NCF figure, primarily a factor of base rental income and common area maintenance reimbursements.

The cap rate applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the long-term investment-grade tenant and the property’s vintage, condition, and location. The property has exhibited a strong historical performance with minimal vacancy since 2009 typically outperforming the submarket. In addition, the 7.0% cap rate applied is substantially above the implied cap rate of 4.2% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 5.0% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X-A 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 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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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