DBRS Finalizes Provisional Ratings on GS Mortgage Securities Corporation Trust 2017-375H

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of 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.

All classes will be privately placed. The Class X-A balance is notional.

Subsequent to publishing the presale report, DBRS has been made aware of a recent news article that reported that Saatchi & Saatchi, one of several brands owned by the largest tenant at the property, Publicis Groupe SA, will be relocating its employees out of the subject to its headquarters in Midtown Manhattan. It has been reported that the Saatchi & Saatchi brand only occupies one floor of the overall space that Publicis Group SA leases at the property, which conforms to DBRS’s experience at the site inspection, and that it is highly likely Publicis Group SA will backfill this space with another division from the company as well as re-brand the signage on the building to Publicis Group SA instead of Saatchi & Saatchi. This news does not have any impact on DBRS’s analysis and has no impact on the ratings for this transaction.

The subject loan is secured by a Class A LEED Gold office building that has prominent views of the Manhattan, New York, skyline and the Hudson River from its Hudson Square location in Lower Manhattan. The property benefits from having full-block frontage along West Houston Street, from Hudson Street to Greenwich Street, and directly between the Hudson River two blocks to the west and the SoHo neighborhood two blocks to the east. The property has a progressive, tiered floor design that allows some floors to have large terraces, a highly desirable amenity in the market. Furthermore, at 19 stories tall and because of the lower profile of many of the neighboring properties, the subject offers commanding views of the city from the terraces and higher floors, with good light penetration throughout. This is particularly true for the western-facing views, as they offer sweeping vistas of the Hudson River. There is no office construction in the nearby area, with a majority of the nearby redevelopment attributed to multifamily.

The property is currently 99.3% occupied, with the office portion at 100.0% occupancy and the ground-floor retail portion at 54.9% occupancy. Tenancy at the property is largely concentrated between Saatchi & Saatchi, the largest tenant, which leases 63.7% of the total net rentable area (NRA) and contributes 64.3% of the total DBRS Base Rent with a lease expiration in January 2023, and Penguin Random House, which occupies 27.4% of the total NRA and contributes 33.4% of the total DBRS Base Rent with a lease expiring in March 2025. As both tenants have been in occupancy at the subject since the late 1980s, property performance has remained relatively stable over the years, boasting a strong 99.5% average occupancy since 2009. Additionally, Saatchi & Saatchi continues to show its commitment to the property, investing approximately $19.0 million ($27.37 per square foot (psf)) to renovate more than half of its space over the past ten years. The subject’s weighted-average office rent of $70.28 psf gross is well below the $77.31 psf and $84.37 psf in average gross rent as reported by CoStar for Class A buildings located in the Hudson Square submarket and the appraiser’s concluded estimates, respectively, indicating material upside potential that is not being reflected in the DBRS net cash flow (NCF). Furthermore, although the retail portion is only 54.9% occupied, it comprises a negligible 0.8% of the DBRS gross rent, and the sponsor places a high value on finding the right user to complement and serve the office tenancy, as opposed to finding any tenant that is willing to pay a high rental rate.

This loan is sponsored through a joint venture between Trinity Real Estate (Trinity; 51.0%); Norges Bank Real Estate Management (Norges; 48.0%); and Hines Interests Limited Partnership (Hines; 1.0%). Although Norges and Hines are new to the ownership structure, Trinity has in one way or another owned the land and fee interest in the property since long before the subject was built in 1987 and, together with the buyback of the leasehold from Tishman Speyer, reaffirms its long-term commitment to the property and local area. Trinity’s portfolio includes approximately 7.0 million square feet of commercial real estate in the Hudson Square area. Norges is one of the world’s largest sovereign wealth funds, and Hines is one of the largest and most well-respected real estate organizations in the world, with $100.0 billion in assets under management as of September 1, 2017. The sponsors have no credit history of foreclosures, defaults or bankruptcies.

Loan proceeds of $400.0 million and sponsor equity of $473.4 million will finance the purchase price of $865.0 million and pay closing costs. Sponsor equity consists of $237.2 million, attributable to Trinity, and $227.9 million, attributable to Norges and Hines. Cushman & Wakefield has determined the value of the collateral leasehold interest to be $1,050,000,000 ($1,056 psf) based on a direct capitalization method utilizing a 4.25% overall cap rate. The DBRS value is substantially lower at $501,683,840 ($460 psf) and was calculated by applying a 7.5% cap rate to the DBRS NCF, resulting in a DBRS loan-to-value ratio of 79.7%.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.