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

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

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in November 2021, the loan continues to exhibit healthy credit metrics. The servicer’ financials for YE2022 and Q2 2023 reflected occupancy, revenue, and net cash flow (NCF) figures that remain consistent with issuance.

The collateral for the loan includes the borrower’s fee-simple and leasehold interests in a portfolio of 18 suburban multifamily properties totaling 3,483 units in South Florida (58.8% of the allocated loan amount (ALA)), with one property in each of Salt Lake City (19.3% of the ALA) and Boston (22.1% of the ALA). All 16 of the properties in Florida are secured by affordable housing properties, of which five are age-restricted properties. Under the current legislation, 14 of the properties in Florida should receive 100% exemption of ad valorem taxes on all affordable units if the properties continue to meet all other statutory requirements for the affordable housing tax exemption.

The transaction sponsor is Starwood Real Estate Property Trust, Inc., which is indirectly controlled by the experienced institutional private investment firm Starwood Capital Group. Loan proceeds of $529.8 million along with the borrower equity of approximately $392.8 million were used to acquire the property for $883.0 million and cover closing costs and transaction expenses. The interest-only floating-rate loan had an initial two-year term with three one-year extension options. The loan was originally scheduled to mature on November 8, 2023; however, the servicer noted that the borrower intends to exercise its first extension option and the loan was listed with a November 2024 maturity date per the November 2023 reporting Execution of each option is conditional upon, among other things, no events of default and the borrower’s purchase of an interest rate cap agreement for each extension term. DBRS Morningstar notes that the cost to purchase a rate cap has likely increased given the current interest rate environment. The borrower will be required to maintain a debt yield above 4.25% throughout the loan term or cash management provisions will be triggered.

The transaction features a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 20.0% of the original principal balance, where individual properties may be released from the trust at a price of 105.0% of the ALA, with customary debt yield tests. Proceeds are applied sequentially for the remaining 80.0% of the pool balance with the release price increasing to 110.0% of the ALA. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the pro rata nature of certain prepayments and for the weak deleveraging premiums. The transaction’s extension options include no performance triggers, financial covenants, or fees required for the borrower to exercise the one-year extensions.

The loan continues to perform in line with DBRS Morningstar’s expectations. As of the financials for the trailing six months ended June 30, 2023, the loan reported an annualized NCF of $34.7 million, above the YE2022 NCF figure of $33.4 million and the DBRS Morningstar NCF of $30.2 million. Despite the increase in cash flow, the debt service coverage ratio declined to 0.99 times (x) as of June 2023 from 2.84x at issuance because of the loan’s floating-rate coupon and an increase in debt service. The increase in interest rate is partially mitigated by the presence of an interest rate cap, which, as mentioned above, the borrower is required to purchase in order to exercise each extension option.

Historically, the portfolio has reported strong occupancy trends, with a weighted-average rate above 98.0% from YE2018 through YE2022. While the portfolio’s average occupancy fell to 96.0% as of Q2 2023, rental rates showed improvement, contributing to a 6.3% increase in rental revenue when compared with YE2022 financials. According to the June 2023 rent rolls, the portfolio had an average rental rate of $1,610 per unit compared with $1,187 per unit at issuance. While effective gross income has experienced 13.1% growth when compared with the DBRS Morningstar NCF, operating expenses have also experienced growth of 9.4%, primarily driven by property insurance, utilities, and payroll and benefits.

DBRS Morningstar’s ratings are based on a value analysis completed at issuance, which considered a capitalization rate for the portfolio of 5.89%, resulting in a DBRS Morningstar value of $513.3 million and a loan-to-value (LTV) ratio of 103.2% on the mortgage loan. The DBRS Morningstar value represents a -42.8% haircut to the appraiser’s value of $899.3 million. To account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 1.5% across the capital structure. DBRS Morningstar applied positive qualitative adjustments to its sizing, totaling 6.75%, to reflect the historically stable performance, property quality, and strong submarket fundamentals for the underlying portfolio.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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).

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.

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 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].