DBRS Morningstar Assigns Provisional Ratings to GS Mortgage Securities Corporation Trust 2021-ROSS, Series 2021-ROSS

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of GS Mortgage Securities Corporation Trust 2021-ROSS, Series 2021-ROSS, as follows:

-- Class A at AAA (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable. Class X and Class H are not rated by DBRS Morningstar.

Class X is an interest-only (IO) class whose balance is notional.

The Class A, A-Y, A-Z, and A-IO certificates (the CAST certificates) can be exchanged for other classes of CAST certificates and vice versa, as described in the offering memorandum. The notional amount of the Class A-IO certificates will be equal to the sum of (1) 50% of the certificate balance of the Class A-Y certificates and (2) 100% of the certificate balance of the Class A-Z certificates.

The GS Mortgage Securities Corporation Trust 2021-ROSS portfolio, consisting of the fee-simple interests in seven properties totaling approximately 2.13 million sf of Class A/B, cross-collateralized office space, is well-positioned to take advantage of improving market fundamentals as the Rosslyn market continues transform into a modern, mixed-use, live-work-play environment. Having been heavily affected by the Department of Defense Base Realignment and Closure Act (BRAC) and the federal budget sequestration as well as historically dominated by government tenants and contractors, the submarket continues to diversify with private sector tenants committing to the market at the portfolio and at other properties in Rosslyn. Overall vacancy rates in the submarket spiked to a peak of 28.2% in 2014 and according to the appraisals, the vacancy rate at the end of 2020 (including sublet availabilities) was 18.1%, up from year-end 2019 due to pandemic-related dynamics, but down from the 2018 level of 21.7%.

Following Amazon’s November 2018 announcement that it will construct its new “HQ2” Pen Place campus in nearby Arlington, demand by private office tenants has further increased in the Rosslyn market as users find themselves priced out of the Arlington office market where rents have already started to increase. Demand by office tenants and residential tenants alike is expected to continue to rise in Rosslyn as workers move to the area for Amazon’s assumed 25,000 new high-paying jobs and Amazon suppliers seek a presence close to their customer. Construction review of the second phase of the HQ2 project commenced early March 2021 and is expected to deliver by 2025. As of December 2020, Amazon had already relocated 1,600 employees to the Arlington area. In addition, approximately 1.5 million sf of noncompetitive, low price-point office product in Rosslyn (approximately 44% of lesser quality supply) is approved or proposed for mixed-use development to create an additional 2,200 residential units, 350 hotel rooms, and 135,000 sf of retail. Previously identified as an office dominant submarket with considerable exposure to government tenants, further development borne out of obsolete office product will continue to reduce the stock of noncompetitive, low price-point office supply in Rosslyn.

Five of the properties were previously securitized in 2017 in the RPT 2017-ROSS transaction, which was financed by GSCRE and BXMT. 1400 Key Boulevard and 1401 Wilson Boulevard, which were part of the 2017 securitization, have been replaced by 1200 Wilson Boulevard and 1701 North Fort Myer Drive. Strong and experienced sponsorship has invested approximately $168.7 million toward renovating and re-leasing the Rosslyn portfolio’s seven buildings since 2017, which has included the creation of spacious upgraded lobbies, renovated common areas, and the addition of modern tenant amenities such as club-quality fitness centers and airy open common areas demanded by today’s workforce. 1100 Wilson Boulevard has seen the addition of a finished roof deck, which allows tenants to enjoy the views of neighboring Washington, D. C., just across the Potomac River. Behind the scenes, the building systems have been upgraded and modernized as needed to meet today’s high-tech needs. The Sponsor’s continued investment in the properties has resulted in new and renewal leases totaling approximately 982,000 sf (46.2% of the total NRA) since the beginning of 2017.

As of February 28, 2021, the portfolio was 78.2% leased across the seven properties to a diverse mix of over 60 individual public and private sector tenants. The portfolio’s largest tenant is the U.S. Department of State (342,967 sf, 16.1% of the NRA), which recently executed a 15-year renewal at 1701 North Fort Myer Drive, expanded into 1200 Wilson Boulevard in 2019, and does not roll until June 2034. Other than the Department of State, no single tenant occupies more than 6.0% of the portfolio’s NRA or produces more than 8.0% of the gross rents. Approximately 671,000 sf (31.6% of the NRA) of the portfolio’s rent roll and 36.1% of total rent carries an investment grade rating. Since 2009, the portfolio has averaged an occupancy level of 81.5%, with a peak occupancy of 98.5% in 2009 and a trough occupancy of 67.0% in 2015.

The portfolio is owned by a joint venture between US Real Estate Opportunities I, L.P. (approximately 89% ownership) (USREO) and an affiliate of Monday Properties (approximately 11% ownership). USREO is a $1.3 billion fund formed by The Goldman Sachs Group, Inc., which controls the fund, and two sovereign wealth funds. Monday Properties has managed the properties since 2005 and, together with its partner, has owned the properties since 2011. As of December 2020, the Sponsor had a total cost basis in the portfolio of approximately $1.35 billion and will have $329 million of implied equity remaining in the portfolio post transaction. The Sponsor also contributed approximately $106 million of equity in June 2020 to pay down the existing debt in order to qualify for an extension. DBRS Morningstar believes that the substantial amount of Sponsor equity, combined with sponsorship’s combined strength and experience as reflected by proactive repositioning of the properties, adds to the strength of this transaction.

The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges and risks to virtually all major commercial real estate (CRE) property types and has created an element of uncertainty around future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has largely been unaffected with year-to-date rent collections as of April 2021 at 99.2%.

GS Commercial Real Estate LLC and Goldman Sachs Bank USA intend to originate the $841 million whole loan, which consists of a $691 million mortgage loan and $150 million of mezzanine debt. The mortgage loan has a two-year initial term (with three one-year extension options). The mortgage loan pays floating-rate interest of Libor plus assumed spread of 2.92000% on an interest-only (IO) basis through the initial maturity of the loan. The spread will increase by 0.15% from and after the commencement of the second extension term; Libor is subject to a floor of 0%. The mezzanine loan has a two-year initial term (with three one-year extension options). The mezzanine loan pays floating-rate interest of Libor plus 9.50000% on an IO basis through the final initial of the loan. On or about May 28, 2021, a portion of the mezzanine loan evidenced by the $112.5 million Note A-1 is expected to be securitized in a stand-alone, mezzanine securitization, the certificates of which are expected to be purchased by Lord Abbett, and the remaining portion of the Mezzanine Loan evidenced by the $37.5 million Note A-2 is expected to be purchased by a sovereign wealth fund that has an ownership interest in USREO.

The Sponsor is partially using proceeds from the whole loan and mezzanine debt to repatriate approximately $63.3 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings as sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-is valuation of $1.17 billion, the Sponsor will have approximately $329 million of unencumbered market equity remaining in the transaction.

The DBRS Morningstar loan-to-value ratio (LTV) is high at 112.4% based on the $691 million mortgage loan and increases substantially to an all-in DBRS Morningstar LTV of 136.7% when factoring in the mezzanine debt. In order to account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 2.75% across the capital structure.

The nonrecourse carveout guarantor is US Real Estate Opportunities I, L.P., which is required to maintain a domestic net worth of only at least $225 million or more, inclusive of the property, and aggregate liquid assets of at least $25 million, effectively limiting the recourse back to the Sponsor for bad act carveouts. “Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, physical waste, and other potential bad acts of the borrower or its sponsor.

Individual properties are permitted to be released with customary requirements. However, the prepayment premium for the release of individual assets is 105% of the ALA for the applicable property up to 25% of the original principal balance and thereafter 115% of the ALA for the applicable property. DBRS Morningstar considers the release premium to be weaker than those of other previously rated single-borrower, multiproperty transactions and, as a result, applied a penalty to the transaction's capital structure to account for the weak deleveraging premium.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X and Class A-IO are interest-only (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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/375376/.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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