DBRS Morningstar Upgrades Four Classes of GS Mortgage Securities Corporation Trust 2017-SLP

DBRS Limited (DBRS Morningstar) upgraded the ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2017-SLP issued by GS Mortgage Securities Corporation Trust 2017-SLP as follows:

--Class B to AAA (sf) from AA (sf)
--Class C to AA (low) (sf) from A (sf)
--Class X-B to A (low) (sf) from BBB (high) (sf)
--Class D to BBB (high) (sf) from BBB (sf)

In addition, DBRS Morningstar confirmed the following ratings:

--Class A at AAA (sf)
--Class X-A at AAA (sf)

All trends are Stable.

The rating upgrades reflect the significant principal paydown of approximately $191.6 million following the release of 47 of the original 138 lodging properties collateralizing the underlying loan. As noted at issuance, property releases are permitted at release premiums ranging from 105% and 120% of the allocated loan amount (ALA), depending on the percentage of the original principal balance. According to the July 2023 remittance, the current pool balance was reported at $553.4 million, representing a collateral reduction of 22.6% since issuance. DBRS Morningstar does not rate the three most subordinate classes in this transaction, Classes E, F, and G, which combine for a balance of $304.8 million of the total pool balance. As a result of the paydown, the overall credit support across the rated portion of the bond stack has significantly increased since issuance, supporting the rating confirmations and upgrades, as further described below.

At issuance, the $800 million mortgage loan was secured by the fee-simple interest in a portfolio of 138 hotels, all but two of which were limited/select-service or extended-stay formats. Of the $800.0 million in total debt, $332.7 million consisted of a senior A note that was split into a $257.7 million controlling note (A-1) and two pari passu, noncontrolling companion loans (A-2 and A-3) totaling $75.0 million. The remaining total debt consisted of a $467.3 million B note. The subject transaction consists of the controlling piece of the larger A note and the full amount of the B note. The remainder of the A note debt is securitized in two multiborrower conduit transactions (GSMS 2017-GS8 and GSMS 2018-GS9), neither of which are rated by DBRS Morningstar. With the release of 47 properties as previously described, the nonpooled pari passu notes declined by 74.2% to $19.3 million. The sponsor for this loan is SCG Hotel Investors Holdings, L.P., an affiliate of Starwood. Starwood is a private investment firm with more than $115 billion of assets under management that focuses primarily on global real estate, having raised more than $75 billion of capital and invested in more than $240 billion of assets since 1991.

There are 91 properties remaining in the portfolio, which comprises 7,202 keys, with properties in Texas representing approximately 22.1% of the ALA. The majority of hotels are affiliated with either Marriott International, Inc. or Hilton Hotels & Resorts. In addition, the average year built of the remaining properties was 1999. The majority of the properties are located within suburban markets (DBRS Morningstar Market Rank of 3, 4, or 5); however, DBRS Morningstar also notes the significant concentration of properties within tertiary markets (DBRS Morningstar Market Rank of 2) following the release of the 47 properties. In comparison, the average year built of the 47 released properties was 1997, with the majority of those properties located within suburban markets.

The loan was previously in special servicing for imminent default related to the original maturity date in October 2022. A loan modification was ultimately granted as of November 2022, extending the loan maturity to February 2024, with one additional 12-month extension option that requires a 10% principal curtailment. The property releases were completed as part of the negotiations surrounding the loan modification, with the proceeds from the sale and an additional $15 million of equity contributing to a reduction in principal of more than 30% since issuance. The sponsor also injected an additional $18.4 million of equity to bridge the gap between the net sale proceeds and the release premium for the sold properties. As of July 2023, the loan remains on the servicer’s watchlist given its recent return from special servicing in April 2023.

Based on the YE2022 financials for the remaining properties, the portfolio reported a net cash flow (NCF) of $53.9 million (reflecting a debt coverage service ratio (DSCR) of 4.64 times (x) for the A note and 1.93x for the full debt stack). While the YE2022 NCF is below the issuer’s corresponding NCF of $68.1 million and the corresponding DBRS Morningstar NCF derived at issuance of $60.8 million (based on the 9.75% capitalization (cap) rate applied when the ratings were assigned in 2020), the performance trajectory continues to show positive momentum, with cash flow increases since YE2021, when NCF was reported at $50.4 million (reflecting a DSCR of 4.34x for the A-note, and 1.80x for full debt stack) and YE2020, when NCF was $26.8 million. Additionally, per the STR figures provided by the servicer for the trailing 12 months ended December 31, 2022, the remaining collateral experienced year-over-year (YOY) increases across all three weighted-average STR metrics, with occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) reported at 70.7% (+4.7% YOY), $113.9 (+10.2% YOY), and $81.3 (+13.1% YOY), respectively. The YE2022 STR report also showed the portfolio outperforming the competitive set with occupancy, ADR, and RevPAR penetration rates of 105.9%, 104.5%, and 111.1%, respectively.

Given the possibility that the significant collateral reduction tied to the property releases increases the risk of adverse selection (a possibility that appears bolstered by the lower market ranks for the remaining collateral compared with the portfolio as a whole at issuance), DBRS Morningstar considered a stressed scenario in evaluating the support for upgrades, driven by the principal reduction and corresponding increased credit support since the last rating action in 2022. A new DBRS Morningstar value was derived, based on a 20.0% haircut to the YE2022 NCF for the remaining collateral and a 9.75% cap rate (matching the cap rate used in 2020). The resulting DBRS Morningstar value of $442.3 million represented a -46.0% variance from the corresponding issuance appraised value of $819.4 million for the remaining collateral. This stressed analysis suggested significant cushion against future cash flow volatility, supporting the rating upgrades with this review. In addition, the $191.6 million paydown represented 35.2% of the ALA for the released properties, providing additional cushion against the adverse selection risk for the remaining collateral.

The DBRS Morningstar rating assigned to Class C is lower than the results implied by the LTV sizing benchmarks by three or more notches. The variance is warranted as the portfolio cash flow, reflective of the remaining properties, remains below issuance levels. In addition, DBRS Morningstar notes the increased concentration of tertiary locations within the remaining portfolio, a factor that could contribute to increased cash flow volatility over the remainder of the loan term.

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/416784 (July 4, 2023).

Classes X-A and X-B 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 credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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

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

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

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

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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/410863.

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