DBRS Morningstar Confirms Ratings on All Classes of GS Mortgage Securities Corporation Trust 2017-FARM
CMBSDBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-FARM issued by GS Mortgage Securities Corporation Trust 2017-FARM:
-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class HRR at AA (sf)
All trends are Stable.
The rating confirmations reflect the overall performance of the transaction, which remains in line with DBRS Morningstar’s expectations as the collateral property is nearly fully leased to an investment-grade tenant on a long-term lease that has staggered expiry dates that begin in 2032. The collateral is a first-lien mortgage on the borrower’s leasehold interest in the property known as Marina Heights State Farm, a 2.0 million-square-foot (sf) suburban office complex in Tempe, Arizona, that consists of five Class A buildings and two retail buildings. Completed between 2016 and 2017, the property was built by State Farm Mutual Automobile Insurance Company and its affiliates (collectively, State Farm) as part of an effort to consolidate small regional offices within the Greater Phoenix area into a single regional headquarters for the company’s southwestern markets. This location houses all facets of State Farm’s office operations, including a call center, automobile insurance, home insurance, banking, executive offices, and back-office operations.
The property is on a 99-year ground lease with the Arizona Board of Regents (on behalf of Arizona State University), which began in 2013 and expires in August 2112. Ground rent payments have varying start dates based on the eighth anniversary of when a particular building was granted a certificate of occupancy, with commencement dates between 2023 and 2026. Because the ground lessor is a tax-exempt government agency, the property is exempt from property taxes.
Whole loan proceeds of $560.0 million, along with $375.7 million of cash and an imputed equity contribution of $22.5 million, financed the purchase of the property by a joint venture between the loan sponsors, JDM Partners LLC and Transwestern Investment Group, in a sale leaseback transaction from State Farm for a purchase price of approximately $930.0 million and total costs of $958.2 million (including closing costs and imputed equity). The trust consists of a $264.0 million participation in the whole loan, with the remaining $296.0 million of pari passu debt held outside the trust. DBRS Morningstar also rates two of the companion note commercial mortgage-backed securities transactions in GS Mortgage Securities Trust 2018-GS10 and Benchmark 2018-B4 Mortgage Trust. The interest-only fixed-rate loan has a 10-year anticipated repayment date (ARD) in January 2028, after which the loan would hyper-amortize until the final maturity date in January 2033.
As of the September 2022 rent roll, the property was 99.6% occupied, with State Farm accounting for 97.1% of the net rentable area (NRA). State Farm occupies space under several leases with varying expiration dates. Two of the leases, representing a combined 434,000 sf (21.4% of the NRA), are scheduled to expire during the loan’s full term; only one of those leases, representing 2.3% of the total NRA, has an expiration prior to the ARD. The Phoenix Business Journal reported in December 2021 that a portion of State Farm’s space (17.0% of NRA) was subleased to the online used car retailer, Carvana; however, a November 2022 article published by CNBC reported that Carvana executed another round of layoffs, terminating a total of approximately 4,000 employees or 20% of Carvana’s workforce in 2022. Although these changes are noteworthy, DBRS Morningstar does not believe they suggest significantly increased risks for the subject transaction given the long-term lease structure for State Farm.
According to the financials for the trailing nine months ended September 30, 2022, the annualized net cash flow (NCF) was reported at $55.5 million (reflecting a debt service coverage ratio (DSCR) of 2.74 times (x)), up from the YE2021 figure of $54.6 million (a DSCR of 2.70x), and in line with the DBRS Morningstar NCF of $55.7 million. The year-over-year increase is primarily driven by scheduled rent escalations from State Farm of 2% each year. This was factored into the DBRS Morningstar NCF given State Farm is a long-term credit tenant and its rents were straight-lined through the term of the loan. According to the September 2022 rent roll, State Farm paid an average rental rate of $28.14 per sf (psf), compared with the issuance rental rate of $26.00 psf. According to Reis, the Q4 2022 average rental rate for Class A office properties within a five-mile radius of the subject reported an average rental rate of $31.29 psf. The overall Tempe submarket reported a Q4 2022 average rental rate of $28.04 psf, compared with the Q4 2021 effective rental rate of $26.87 psf.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.
Notes:
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023), 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 info@dbrsmorningstar.com.
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 info@dbrsmorningstar.com.
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