DBRS Morningstar Confirms Ratings of GSCG Trust 2019-600C, Maintains Negative Trends on Three Classes

DBRS Limited (DBRS Morningstar) confirmed its ratings on the GSCG Trust 2019-600C as follows:

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

Classes A, B, C, X, and D have Stable trends. Classes E, F, and G continue to have Negative trends because DBRS Morningstar is concerned about the property’s exposure to WeWork, which accounts for 51.7% of the collateral property’s net rentable area (NRA). Although there is a long-term lease in place, the company has shuttered many of its facilities since the outbreak of the Coronavirus Disease (COVID-19) pandemic, and an infusion of liquidity from its largest investor, Softbank, failed to materialize. This places the company at increased risk with significantly reduced revenue.

The property exhibits significant tenant concentration, with the largest tenant—WeWork—accounting for 51.7% of the NRA. After an initial public offering failed in 2019, WeWork announced a second plan to go public in March 2021 through a merger with the special purpose acquisition company BowX Acquisition. Although this is a newsworthy development, WeWork continues to face significant challenges and could continue to shed locations as profitability issues persist. It was reported in February 2021 that a WeWork spokesperson had confirmed that the company is considering closing four locations in San Francisco, including locations at 1161 Mission Street, 995 Market Street, 156-160 Second Street, and 25 Taylor Street, and unconfirmed reports indicate that WeWork had already terminated its leases at 180 Sansome Street and 1 Post Street (all six of these properties have been removed from the WeWork website), though the subject property has not been mentioned in any of these reports. As of the first quarter of 2021, WeWork has reported a net loss of $2.06 billion with total revenue of $598 million.

The collateral for the subject transaction is a $240.0 million first-lien mortgage loan secured by an approximately 359,154-square foot (sf), 20-story, Class A office property with ground-floor retail and a three-level, below-grade parking garage located at 600 California Street in San Francisco bordering the Union Square and Chinatown neighborhoods. The three largest tenants in place as of May 2021 account for 71.6% of the NRA and include WeWork; Cardinia Real Estate LLC, a subsidiary of Omnicom Group Inc. (11.6% of the NRA); and Audentes Therapeutics (8.3% of the NRA). There are no termination clauses available in the WeWork lease at the subject property, but DBRS Morningstar notes the firm’s lease for the Wilshire Courtyard property that backs the Natixis Commercial Mortgage Securities Trust 2019-MILE transaction, also rated by DBRS Morningstar, was modified to accommodate the company’s request to downsize its space at that property.

The sponsor, Ark Capital Advisors, LLC (Ark), used the loan proceeds to acquire the property for $322.8 million, or $898 per rentable sf. Including a transfer tax of approximately 3.0%, the total purchase price was $332.5 million, or $926 per rentable sf. The trust loan balance of $240.0 million results in a 74.3% loan-to-purchase price excluding the transfer tax, 72.2% including the transfer tax, and a 64.8% loan-to-value (LTV) ratio based on the as-stabilized appraised value of the collateral at $370.0 million. Ark is a joint venture among Ivanhoe Cambridge, the Rhone Group, and the parent company of WeWork. Goldman Sachs Bank USA and Citi Real Estate Funding Inc. co-originated the five-year, fixed-rate interest-only loan, which matures in September 2024.

The property, which was built in 1991, was awarded the LEED Gold certification in 2009 and 2016. It has benefitted from the prior owner’s investment of $8.9 million in capital improvements since 2015. The building sports an atrium-style lobby, clad in marble and granite with state-of-the-art systems. Major capital improvements include the full lobby renovation; the addition of a new management office, a fitness center, and a bike room; a new roof membrane; and boiler room replacements. In addition, the sponsor’s planned capital improvement program includes an additional $11.6 million in elective capital improvements to modernize the building’s elevators, add exterior waterproofing to the building, upgrade the building’s HVAC system and common area restrooms, and replace the cooling towers. The servicer has reported that the improvement projects are ongoing and that progress had been slowed by the pandemic. As of the May 2021 servicer reporting, $7.6 million of the $11.6 million collected at issuance remains in the capital reserve account.

The subject benefits from its desirable location, within the strong and historically stable North Financial District submarket in San Francisco. The Financial District has the highest concentration of Fortune 500 companies occupying space in the San Francisco central business district. The property is situated at the corner of California Street and Kearny Street, bordering the Union Square and Chinatown neighbourhoods. The building has good exposure with approximately a half block of frontage on California Street, a primary two-way, four-lane major arterial that runs east to west in downtown San Francisco, and a full block of frontage on Kearny Street, which is a primary street that runs north to south through San Francisco. The location affords excellent access to public transportation, with four BART subway lines that stop twice in the Financial District and transport commuters to and from San Francisco and the East Bay.

As of the December 2020 rent roll, the property was 99.2% occupied by 14 tenants (including four retail tenants). The retail portion of the property accounts for less than 2.0% of the annual base rent, while the office tenants pay an average annual rental rate of $75.08 per sf. According to the December 2020 rent roll, six tenants, representing 14.1% of the NRA, have lease expirations through December 2022. This includes the fifth-largest tenant, Burr Pilger Mayer, Inc (5.8% of NRA), which has a lease expiration in October 2021, and the seventh-largest tenant, Finastra Financial Technology Corp. (Finastra; 4.1% of NRA), which has a lease expiration in November 2021. At issuance, it was noted that Finastra subleases its space to Zignal Labs Inc. (which operates its headquarters from the subject) at a base rental rate approximately $10.00 below what Finastra is paying, on a lease that is coterminous with the Finastra lease.

As of the YE2020 financials, the servicer reported a net cash flow (NCF) of $17.4 million and debt service coverage ratio (DSCR) of 1.79 times (x). This compares favourably with the YE2019 NCF and DSCR of $13.2 million and 1.36x, respectively, and is in line with the issuer’s underwriting of $17.4 million and 1.79x, respectively. The decrease in 2019 was largely a result of vacancy and a free rent period for a portion of the WeWork tenant’s 83,000 sf of expansion space. The free rent period ended in March 2020.

When DBRS Morningstar ratings were assigned in 2020, the DBRS Morningstar NCF of $14.7 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $217.1 million, a variance of -41.3% from the appraised value at issuance of $370.0 million. The DBRS Morningstar Value implies an LTV of 110.6%, as compared with the LTV on the issuance appraised value of 64.8%. The NCF figure applied as part of the analysis represents a -16.1% variance from the Issuer’s NCF, primarily driven by leasing costs and vacancy.

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 is an interest-only (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 Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 26, 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/359905.

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 [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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