DBRS Finalizes Provisional Ratings on GS Mortgage Securities Trust 2018-GS10

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-GS10 (the Certificates) issued by GS Mortgage Securities Trust 2018-GS10:

-- 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-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G-RR at B (low) (sf)

All trends are Stable.

The pooled RR Interest represents the right to receive approximately 3.53% of all amounts collected on the Mortgage Loans (net of all expenses of the issuing entity) that are available for distribution to the pooled certificates (other than the Class R certificates). Classes D, E, X-D, F and G-RR are non-offered certificates.

The collateral consists of 33 fixed-rate loans secured by 57 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. Trust assets contributed from three loans, representing 19.2% of the pool, are shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective ratings within the pool. When the combined 19.2% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. When the cut-off loan balances were measured against the DBRS net cash flow and their respective actual constants, one loan, representing 1.1% of the total pool, had a DBRS Term debt service coverage ratio (DSCR) below 1.15x, a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low-interest-rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 16 loans, representing 52.5% of the pool, having refinance DSCRs below 1.00x, and ten loans, representing 42.5% of the pool, having refinance DSCRs below 0.90x. Aliso Creek Apartments and 1000 Wilshire, which represent 15.8% of the transaction balance and are two of the pool’s loans with a DBRS Refi DSCR below 0.90x, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust.

Three loans — 1000 Wilshire, Aliso Creek Apartments and Marina Heights State Farm — representing a combined 19.2% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. The 1000 Wilshire loan exhibits credit characteristics consistent with an A (low) shadow rating, Aliso Creek Apartments exhibits credit characteristics consistent with an “A” shadow rating and Marina Heights State Farm exhibits credit characteristics consistent with a AA shadow rating. The hotel concentration of two loans, representing 2.6% of the pool balance, is at a lower level than recent transactions that typically have concentrations in excess of 10.0%. Hotel properties have higher cash-flow volatility than traditional property types, as their income, which is derived from daily contracts rather than multi-year leases, and their expenses, which are often mostly fixed, are quite high as a percentage of revenue. These two factors cause revenue to fall swiftly during a downturn and cash flow to fall even faster because of the high operating leverage. Four loans, representing 16.8% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes two of the largest 15 loans: GSK North American HQ and the FXI Portfolio. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default.

Eleven loans, comprising 47.4% of the pool, were considered to be of Above Average or Average (+) property quality based on physical attributes and/or a desirable location within their respective markets. Five of these loans are within the top ten (GSK North American HQ, 1000 Wilshire, Aliso Creek Apartments, MOA Leased Fee Portfolio and Thorncreek Crossing). Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance. Ten loans, representing 20.7% of the pool, are located in tertiary or rural markets, which are considered weak in times of stress and have low liquidity.

Term default risk is moderate, as indicated by the strong DBRS Term DSCR of 1.80x. In addition, 18 loans, representing 63.8% of the pool, have a DBRS Term DSCR in excess of 1.50x. Even when excluding the three investment-grade shadow-rated loans, the deal exhibits a high DBRS Term DSCR of 1.72x. Fourteen loans, representing 60.3% of the pool, including ten of the largest 15 loans, are structured with full-term interest-only (IO) payments. An additional ten loans, comprising 23.3% of the pool, have partial IO periods ranging from 24 months to 60 months. As a result, the transaction’s scheduled amortization by maturity is only 5.4%, which is generally below other recent conduit securitizations. The transaction’s weighted-average DBRS Refi DSCR is 0.95x, indicating higher refinance risk on an overall pool level. In addition, 16 loans, representing 52.5% of the pool, have DBRS Refi DSCRs below 1.00x, including five of the top ten loans and eight of the top 15 loans. Ten of these loans, comprising 42.5% of the pool, have DBRS Refi DSCRs less than 0.90x, including five of the top ten loans and seven of the top 15 loans.

Classes X-A, X-B and X-D are 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 ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

The ratings assigned to Class B, Class C, Class D and Class G-RR materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given expected dispersion of loan-level cash flows post issuance.

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 Multi-borrower CMBS Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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