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

DBRS, Inc. (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 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 closed in September 2017 and consists of a ten-year interest-only (IO) fixed-rate trust loan. 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. 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 noted Penguin Random House was set to vacate its space in early 2019 before its lease expiration in March 2025, and the plan was 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 leased space now expires coterminously in January 2043. Additionally, MMS USA Holdings, Inc., an investment-grade entity, provides a full corporate guaranty to the Saatchi & Saatchi lease throughout the term. Termination proceeds from Penguin Random House will be deposited into a servicer-controlled escrow account and funds will be utilized for tenant improvement (TI) and leasing commissions related to the new Saatchi & Saatchi leases. TI work will be completed for the expanded and current Saatchi & Saatchi office space and is expected to total $74.9 million, or $78 per sf (psf). The TI work is scheduled to be finished in the first half of 2020.

Saatchi & Saatchi will occupy approximately 89.5% of NRA and the subject is now essentially operates as a single-tenant property. Based on the June 2019 rent roll, the property will be 97.7% leased and occupied once Penguin Random House vacates its space and Saatchi & Saatchi expands. Saatchi & Saatchi will receive full rent abatements for the expanded space that was scheduled to begin in August 2019, ending in November 2020. Once rent abatements expire, Saatchi & Saatchi will begin paying $25 psf in base rents, which is well below market rates. Rent escalators are scheduled for January 2023 for the current Saatchi & Saatchi leased space and March 2025 for the expanded Saatchi & Saatchi space, which 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 trailing three-month ending March 31, 2019, DSCR of 3.38 times (x), which is slightly greater than the year-end (YE) 2018 DSCR of 3.23x and the YE2017 DSCR of 3.18x. Due to the recent leasing developments, DBRS calculated a new DBRS net cash flow (NCF), which was utilized for the subject review. The updated DBRS NCF of $36.8 million, resulting in a DSCR of 2.66x, is slightly lower than the DBRS NCF of $37.6 million derived at issuance. In the near term, NCFs are expected to be weakened because of the scheduled rent abatements; however, cash flows are expected to rebound and remain stable in 2021 and throughout the remaining loan term thereafter.

Class X-A is an 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.

DBRS 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.dbrs.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS rated), as well as loan-level and transaction-level commentary for most DBRS-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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.

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.

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 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.dbrs.com or contact us at info@dbrs.com.

DBRS, Inc.
333 West Wacker Drive, Suite 1800
Chicago, IL 60606 USA