DBRS Morningstar Places All Classes of GSCG Trust 2019-600C Under Review With Negative Implications

DBRS Limited (DBRS Morningstar) placed its ratings of all classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-600C issued by GSCG Trust 2019-600C Under Review with Negative Implications 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)

There are no trends for these rating actions.

The five-year $240.0 million loan is secured by a Class A, Leed Gold-certified office building totaling 359,154 square feet (sf) in the North Financial District of San Francisco. The loan transferred to special servicing in March 2023 because of a payment default, with the last payment received in February 2023. According to the special servicer, the largest tenant, WeWork (51.7% net rentable area (NRA) on a lease expiring in March 2035), has stopped making its rent payments and is currently seeking a lease modification. Based on recent news articles, WeWork is employing cost-cutting measures and restructuring its debt in order to avoid bankruptcy. According to an article published by New York Times in March 2023, WeWork reached a deal with SoftBank and other investors to significantly reduce its debt. The agreement would cancel or convert about $1.5 billion of their debt into equity. An article by the Wall Street Journal published in November 2022 stated that WeWork announced the closure of 40 locations in the United States. As WeWork continues to rightsize its operations and discussions surrounding the lease modification are ongoing, it is uncertain to what degree the terms of the modification may affect the subject’s net cash flow (NCF) and ultimately the loan’s ability to meet its debt obligations. Lastly, interest shortfalls have accrued over the past two months, with approximately $22,000 of cumulative shortfalls tied to special servicing fees. Given the uncertainty surrounding WeWork and its lease modification, DBRS Morningstar placed the ratings of all classes Under Review with Negative Implications until more information becomes available in the coming months. It is DBRS Morningstar’s expectation to evaluate the information as part of the process to resolve the Under Review with Negative Implications status within a 90-day period, but the resolution period may extend further depending on the information received from the servicer. The sponsor, Ark Capital Advisors, LLC (Ark), is a joint venture among Ivanhoe Cambridge, the Rhone Group, and The We Company. The We Company is the owner of approximately 80% of Ark and is also the parent company of WeWork.

According to the financials for the trailing 12 months ended September 30, 2022, the loan reported an NCF of $16.6 million with a debt service coverage ratio (DSCR) of 1.71 times (x), which is unchanged from YE2021 but slightly below the YE2020 NCF of $17.4 million and DSCR of 1.79x. These figures are still above the DBRS Morningstar NCF of $14.7 million and DSCR of 1.69x. According to the April 2023 loan-level reserve report, there was $3.2 million held across reserves, including $2.4 million in a replacement reserve and approximately $573,000 in other reserves. As per the December 2022 rent roll, the subject was 87.9% occupied, compared with YE2021 occupancy of 88.4% and YE2020 occupancy of 99.2%. The third-largest tenant, Audentes Therapeutics (Audentes; 8.3% of NRA), has a lease expiring in June 2023 and is not expected to extend its lease. Although the borrower is working toward backfilling Audentes’s space, the borrower has expressed challenges in general to lease-up the vacant space at the subject. Upon the departure of Audentes, the occupancy rate will drop to approximately 80%.

Per Reis, office properties in the North Financial District submarket reported a Q1 2023 vacancy rate of 14.4% with an asking rental rate of $67.91 per sf (psf), compared with the Q1 2022 vacancy rate of 10.9% and asking rental rate of $68.13 psf. The subject’s December 2022 average rental rate was of $80.45 psf, but this was mainly attributed to WeWork’s above-market rent at $86.40 psf and is likely to be affected after the revised lease modification.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

DBRS Morningstar notes a risk sensitivity analysis was not completed for this rating action as the ratings of all classes were placed Under Review with Negative Implications.

This rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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