DBRS Morningstar Confirms Ratings on All Classes of GS Mortgage Securities Trust 2018-GS10

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-GS10 issued by GS Mortgage Securities Trust 2018-GS10 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G-RR at B (low) (sf)

All trends are Stable. The rating confirmations reflect the overall performance of the underlying collateral, which generally remains in line with DBRS Morningstar’s expectations since the last review.

Three loans—1000 Wilshire (Prospectus ID#2; 8.2% of the pool balance), Aliso Creek Apartments (Prospectus ID#3; 7.9% of the pool balance), and Marina Heights State Farm (Prospectus ID#11; 3.4% of the pool balance)—were shadow-rated investment grade by DBRS Morningstar at issuance. With this review, DBRS Morningstar confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

As of the July 2023 reporting, all loans remain in the pool with an aggregate principal amount of $797.4 million, representing a nominal collateral reduction of 1.6% since issuance as a result of loan amortization. One loan, representing 0.2% of the pool, is fully secured. Two loans, representing 10.5% of the pool, are in special servicing, and six loans, representing 16.2% of the pool, are on the servicer’s watchlist, for low debt service coverage ratios (DSCRs), occupancy declines, or deferred maintenance.

The pool is concentrated by property type with loans secured by office, retail, and industrial properties representing 34.4%, 23.9%, and 16.5% of the pool balance, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. While the majority of office loans in the transaction continue to perform as expected, there were two loans that were showing declines from issuance or otherwise exhibiting increased risks from issuance. For this review, these loans were analyzed with stressed scenarios to increase expected losses (ELs) as applicable, which resulted in a weighted-average (WA) EL that was greater than three times the pool’s WA EL for these two loans secured by office properties.

DBRS Morningstar continues to closely monitor the largest loan in the pool, GSK North American HQ (Prospectus ID #1; 9.4% of the pool), following the decision by the property’s tenant, GlaxoSmithKline plc (GSK), to vacate its space in Q1 2022, as announced in 2021. The subject loan is secured by a Class A office complex in Philadelphia’s Navy Yard submarket. The property was built-to-suit for GSK at a cost of $80.0 million in 2013, when GSK executed a 15-year lease through September 2028 with no termination options.

The loan was transferred to special servicing for imminent default in November 2022, following the borrower’s request to approve the termination of the lease with GSK. The borrower also requested a 12-month maturity extension prior to the June 2023 maturity date; however, both requests were ultimately denied. The servicer is currently dual tracking the workout with negotiations about a possible loan extension, including an equity injection from the borrower, or alternative options to refinance on an ongoing basis. According to the July 2023 reporting, the loan has been kept current.

Although the space is dark, the former tenant will continue to make its rental monthly payments until September 2028. The loan is structured with a cash flow sweep that was activated as GSK went dark. According to the servicer report, approximately $4.7 million was being held in the cash management account and $0.6 million held in a tenant reserve. The loan has historically benefited from strong performance, with the most recent trailing six months (T-6) financials available ended June 30, 2022, reflecting a DSCR of 2.42 times (x), compared with the YE2021 and YE2020 DSCRs of 2.33x.

Per the appraisal at issuance, the dark value of the property was reported at $91.8 million, which is in excess of the whole-loan amount of $85.2 million, providing some cushion if no leasing traction can be made to stabilize the asset. Per Reis figures, office properties in the South Philadelphia submarket have historically reported strong market fundamentals, supported by the Q1 2023 vacancy rate of 2.3%, compared with the Q1 2022 vacancy rate of 1.1% and Q1 2021 vacancy rate of 1.7%. According to an article published by The Philadelphia Inquirer in June 2022, a $6.0 billion investment plan to revitalize and redevelop the Navy Yard over the next 20 years was announced, with the hope of creating a new neighborhood in the city. This plan is estimated to bring 12,000 new jobs to the Navy Yard, as well as 8.9 million square feet (sf) of new residential, commercial, retail, and mixed-use space. The developers, Mosaic Development Partners and Ensemble Real Estate Investments, plan to build 4,000 residential units as part of the redevelopment.

Although the loan’s refinance risk has significantly increased following the departure of GSK, mitigating factors include historically strong submarket and property performance in addition to the redevelopment plans discussed above and the sponsor’s commitment to the property. Korea Investment Management, an investment firm owned by Korea Investment Holdings Co., Ltd. (a financial services firm in South Korea), is the loan sponsor and has been working with Coretrust Capital Partners, LLC, which serves as a domestic asset manager in the United States. At issuance, the sponsor contributed $45.9 million of equity to purchase the property. With this review, DBRS Morningstar elevated the probability of default in its analysis to increase the loan’s expected loss.

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, X-B, and X-D are 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 credit rating assigned to Class B materially deviates from the credit rating implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviations is due to uncertain loan-level event risk. The analysis for this review included stressed scenarios for two office loans, most notably GSK North American HQ given the associated refinance risk. While the loan is in special servicing, mitigants noted above included historically strong submarket and property performance in addition to the redevelopment plans discussed, the sponsor’s commitment to the property and the dark value which exceeds the total loan amount. With these considerations, the material deviation is warranted.

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.

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model Version 1.1.0.0 (March 16, 2023) https://www.dbrsmorningstar.com/research/410913

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 (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 analyzes structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/417279.

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