DBRS Confirms All Classes of GS Mortgage Securities Corporation Trust 2017-375H

DBRS Limited (DBRS) confirmed the ratings of the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-375H issued by GS Mortgage Securities Corporation Trust, Series 2017-375H as follows:

-- 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 rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS’s expectations since issuance. The transaction closed in September 2017 and consists of a ten-year interest-only (IO) fixed-rate loan of $400.0 million secured by 375 Hudson in New York, New York. The collateral is a 19-story, Class A LEED Gold-certified office building located in the Hudson Square submarket of Manhattan. This property includes 1.03 million square feet (sf) of office space (94.5% of net rentable area (NRA)), 45,308 sf of storage (4.2% of NRA) and 8,615 sf of retail (0.8% of NRA). According to year-to-date June 2018 financials, the debt-service coverage ratio (DSCR) was 3.24 times (x) compared with the year-end 2017 DSCR of 3.18x, and the DBRS Term DSCR derived at issuance of 2.69x. The improved June 2018 DSCR is reflective of a 1.7% increase in net cash flow (NCF) over the prior period and represents NCF growth of 18.2% over the DBRS NCF figure derived at issuance, primarily due to the 7.5% vacancy factor assumed by DBRS.

As of the June 2018 rent roll, the subject was 99.4% occupied by three office tenants and four retail tenants. Occupancy is generally flat from issuance, with the office portion of the property 100% occupied and the retail portion 57.6% occupied. There are no office tenants with leases expiring until 2023. The rent roll reported improved gross rents from $66.50 per square foot (psf) at issuance to $70.28 psf as of June 2018 due to rent escalators for Saatchi & Saatchi and Turner Construction Company. According to CoStar as of September 2018, the Hudson Square submarket reported a vacancy rate of 9.7% and an average gross rental rate of $77.31 psf, which implies the subject is outperforming the submarket vacancy, but underperforming relative to gross rental rates.

The three largest tenants, comprising 98.6% of the NRA, are Saatchi & Saatchi (63.9% of NRA with lease expiration of January 2023), Penguin Random House (27.4% of NRA with lease expiration of March 2025) and Turner Construction Company (7.3% of NRA with lease expiration of January 2023). At the transaction’s closing, DBRS noted that Publicis Groupe SA (parent company of Saatchi & Saatchi) had been occupying the Saatchi & Saatchi space with Saatchi & Saatchi only operating out of one of the 13 floors leased. In September 2017, Saatchi & Saatchi left the subject and moved to 1675 Broadway in Midtown Manhattan; however, the tenant continues to honor its lease obligations at the subject. The investment-grade tenant Publicis Groupe does not guarantee the lease but has moved operations to the site. At issuance, it was noted that Penguin Random House would vacate the property in early 2019, prior to its lease expiration, as it needed extra space. The investment-grade tenant plans to sublease the space through the March 2025 lease expiry. DBRS has requested confirmation of the current use for both the Saatchi & Saatchi and the Penguin Random House spaces from the servicer and the response is pending as of the date of this press release.

Although the significant chunk of space leased to tenants that are no longer in place for the bulk of that space presents increased risk for this loan, DBRS considered these factors at issuance and noted the mitigants in the likelihood that Publicis Groupe would repurpose the space for other divisions within the company and the below-market rental rate for Penguin Random House. In addition, the loan is structured with a rollover reserve that will fund an amount equal to $60.00 psf or $75.00 psf for the Saatchi & Saatchi space (depending on how much of the Penguin Random House space has been sublet) if the lease is not renewed by June 2021.

Class X-A is an interest-only (IO) certificate 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.

As part of this review, DBRS has provided 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.dbrs.com. The platform includes loan level-data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS rated transactions.

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

The principal methodology is CMBS North American Surveillance, 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.

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@dbrs.com.

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.

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