DBRS Morningstar Changes Trends of Three Classes of GSCG Trust 2019-600C to Stable from Negative, Confirms Ratings on Remaining Classes

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-600C issued by 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)

All trends are Stable.

With this review, DBRS Morningstar changed the trends on Classes E, F, and G to Stable from Negative. This is reflective of DBRS Morningstar’s improved outlook for the collateral office property’s performance as concerns surroundingthe largest tenant, WeWork (51.7% of net rentable area (NRA)), have diminished in the last year. Amid previous stages of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar maintained Negative trends on those three classes due to WeWork’s closure of many co-working locations across the country in response to a national drop in office usage, a trend that drove exits and/or lease modification requests by the company for other properties backing CMBS loans. Although WeWork’s profit margins are still negative, the pandemic’s impact on coworking space has been less significant than originally projected. WeWork continues to operate at the subject on a lease through March 2035 with no termination options and, to date, has not requested any modifications of its lease terms. DBRS Morningstar also notes forecasts that suggest recent upticks in market vacancy rates will be recovered over the next few years, another contributor to the trend changes with this review.

The five-year $240.0 million loan is interest-only (IO) and is secured by a Class A, LEED Gold-certified office building totalling 359,154-square feet (sf). The property is located at 600 California Street in the North Financial District of San Francisco, bordering Union Square and Chinatown neighbourhoods. The sponsor, Ark Capital Advisors, LLC (Ark), is a joint venture among Ivanhoe Cambridge, the Rhone Group, and The We Company (WeWork’s parent company). Ark used the loan proceeds to acquire the property for $322.8 million, or $898 per rentable sf. The property benefitted from the prior owner’s investment of $8.9 million in capital improvements since 2015. Additionally, the sponsor’s planned capital improvement program includes an additional $11.6 million being allocated towards improvement projects. As of April 2022 servicer reporting, $4.2 million remains in the capital improvement reserve with $5.1 million held across all reserves.

According to the January 2022 rent roll, the property was 88.3% occupied, compared with the September 2021 occupancy rate of 98.2%. A Commercial Café listing as of May 2022 shows an availability rate of 12.3% at the property, suggesting no new leases have been signed since the January 2022 rent roll. Outside of WeWork, the tenancy is quite granular as the next largest tenants at the property include Cardinia Real Estate LLC (11.6% of the NRA, lease expiry in May 2025) and Audentes Therapeutics (8.3% of the NRA, lease expiry in June 2023). According to Reis, office properties located in North Financial District submarket reported a year-end (YE) 2021 vacancy rate of 9.7%, an increase from 7.4% at YE2020 and 4.9% in YE2019. Although the recent uptick in vacancy for both the property and the submarket are noteworthy developments, DBRS Morningstar also notes that vacancy is expected to decline to historical submarket levels in the coming years with the 2027 vacancy rate forecasted at 5.3%.

The loan reported a debt service coverage ratio (DSCR) of 1.86 times (x) for the trailing 12 months ended September 30, 2021, compared to the YE2020 DSCR of 1.79x, and the DBRS Morningstar DSCR of 1.69x at issuance. Given the property’s excellent location within a historically stable submarket, Class A quality and continued stable performance, the long-term outlook for this loan remains consistent with DBRS Morningstar expectations issuance.

ESG CONSIDERATIONS
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 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.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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

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