DBRS Morningstar Confirms Credit Ratings on All Classes of GS Mortgage Securities Corporation Trust 2021-STAR

DBRS Limited (DBRS Morningstar) confirmed the credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-STAR issued by GS Mortgage Securities Corporation Trust 2021-STAR as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (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.

The rating confirmations reflect the overall stable performance of the transaction, as evidenced by the stable-to-improving cash flow and occupancy reported since issuance. The portfolio is backed by multifamily properties in desirable submarkets with generally stable occupancy and rental rate trends. At issuance, DBRS Morningstar noted the portfolio’s generally favorable asset quality and location in high-growth markets. These factors and the stability of the markets since issuance have contributed to performance metrics for the portfolio that are in line with DBRS Morningstar’s expectations at issuance.

The $470.6 million loan is secured by the fee-simple interest in seven Class A suburban multifamily properties totaling 2,494 units across five states and five distinct multifamily submarkets including Tampa, Florida; Round Rock, Texas; Phoenix, Arizona; Raleigh, North Carolina; and Lawrenceville, Georgia. The transaction sponsorship is a joint venture between Starlight Group Property Holdings Inc (Starlight), the Public Sector Pension Investment Board (PSPIB), and the Future Fund Board of Guardians (Future Fund). The two-year, interest-only, floating-rate loan had an initial maturity in December 2023. According to the servicer, the borrower has requested to exercise the first of three one-year extension options available, which has been conditionally approved and will extend the maturity date to December 2024. The borrower is required to purchase a new interest rate cap agreement with each extension. The loan has a fully extended maturity date of December 2026.

The loan allows for pro rata paydowns for the first 20.0% of the original principal balance at a prepayment premium of 110.0% of the allocated loan amount (ALA) for the release of individual assets, provided the aggregate portfolio loan’s debt yield is equal to at least 5.72% after the releases. DBRS Morningstar considers this structure credit negative, particularly at the top of the capital stack. At issuance, a penalty was applied to the transaction’s capital structure to account for the pro rata nature of certain voluntary prepayments. To date, there have been no property releases.

At issuance, DBRS Morningstar noted the sponsors had planned a capital expenditure project of $29.1 million for the portfolio. Planned improvements during the first three years of the loan term included the renovation of 1,214 units across the portfolio along with improvements to common areas, including clubhouses, common rooms, gyms, and dog parks. The project was to be funded directly by the sponsors, with no reserve collected at issuance. The servicer provided site inspections dated October/November 2022 for all seven properties and, at the time of those visits, renovations were ongoing. An update on the status of the planned work has been requested and, as of the date of this press release, the servicer has noted that the 2023 site inspections are ongoing. DBRS Morningstar’s analysis does not consider any upside as a result of the completion of the planned improvements, but it is expected to contribute to the overall stability of performance through the fully extended loan term.

The loan is currently on the servicer’s watchlist and is being monitored for a low debt service coverage ratio (DSCR) and upcoming maturity date. As per the financial statement for the trailing six months (T-6) ended June 30, 2023, the portfolio reported a consolidated occupancy rate of 92.1%, compared with YE2022 and issuance occupancy rates of 92.6%, and 94.9%, respectively. The net cash flow (NCF) for the T-6 ended June 30, 2023, was reported at $14.5 million, implying an annualized NCF of $29.0 million, compared with the YE2022 NCF of $26.8 million and the DBRS Morningstar NCF of $25.4 million. The DSCRs for the same time periods were reported at 0.89 times (x), 4.12x, and 3.33x, respectively. The decline in DSCR is attributable to the increase in debt service payments, given the floating rate nature of the loan. The borrower’s original interest rate cap agreement results in a minimum DSCR of 1.10x. As mentioned above, the borrower is required to purchase a replacement interest rate cap agreement with each extension.

DBRS Morningstar notes increased concern about insurance costs for three of the properties within the portfolio that are located in Florida in areas prone to climate risk. As per financial statements for the T-6 ended June 30, 2023, there has been an average increase of 41.4% in the reported insurance premiums for the three Florida assets compared with the same six-month period one year prior. DBRS Morningstar notes the likelihood that this line item will pose concerns in the coming years, given the increase in insurance costs in this state in particular. Mitigating some of this concern are the strong submarket fundamentals for these assets and the portfolio as a whole. The underlying properties are located in submarkets that are highly desirable for multifamily assets, with strong growth potential and favorable population statistics. As of Q3 2023, Reis reports that the portfolio’s respective submarkets have a weighted-average vacancy rate of 4.4%, and an average five-year vacancy rate forecast of 4.5%. For the Tampa-St. Petersburg multifamily market specifically, the Q3 2023 vacancy rate was 4.8%, forecast to decline to 4.5% over the next five years, while asking rents are projected to grow at an average rate of 3.4% over the same period. The portfolio also benefits from geographic diversity. The Florida properties represent 40.3% of the total units, with the remaining portfolio spread across an additional four distinct markets.

At issuance, DBRS Morningstar derived a value of $391.2 million, based on a concluded cash flow of $25.4 million and a capitalization rate of 6.5%, resulting in a DBRS Morningstar loan-to-value ratio (LTV) of 120.3% compared with the LTV of 60.8% based on the appraised value at issuance. DBRS Morningstar made positive qualitative adjustments totaling 6.3% to the LTV sizing benchmarks to account for the portfolio’s historical performance, ongoing renovations, and strong submarket fundamentals.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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
DBRS Tower, 181 University Avenue, Suite 700
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 Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://www.dbrsmorningstar.com/research/422174)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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/417279.

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