DBRS Morningstar Confirms Credit Ratings on All Classes of GSF 2021-1

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of notes issued by GSF 2021-1 (the Issuer):

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class X Notes at A (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (low) (sf)
-- Class E Notes at BB (low) (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect the continued stable performance of most of the underlying collateral, which generally remain in line with DBRS Morningstar’s expectations since the last rating action. The transaction benefits from a relatively well distributed concentration of property types that collateralize the underlying loans as well as the overall steady financial performance of the loans in the pool.

On November 3, 2023, DBRS Morningstar finalized its “North American CMBS Multi-Borrower Rating Methodology” (the Methodology) and CMBS Insight Model Version 1.2.0.0 (the Model). The Methodology and the Model present the framework for which DBRS Morningstar’s credit ratings on North American commercial mortgage-backed security (CMBS) multi-borrower transactions are assigned and/or monitored. A more detailed explanation of the updates and their rationales can be found in the press release “DBRS Morningstar Publishes Final North American CMBS Multi-Borrower Rating Methodology and Predictive Model” at https://www.dbrsmorningstar.com/research/422861.

As noted in the press release, the updates to the Methodology were expected to have a neutral to positive impact on a limited number of multi-borrower conduit and small-balance transactions that include loans with five-year original terms. The probability of default (POD) assumptions for five-year original term loans with stabilized property cash flows (in conduit and agency transactions) are the same as for 10-year loans. The credit rating action is a result of the application of the above Methodology and Model, inclusive of consideration for updated performance data on the subject transaction.

As of the October 2023 remittance, the pool consisted of 23 performing loans secured by traditional commercial real estate properties with a combined balance of $496.4 million. There were no loans on the servicer’s watchlist or in special servicing. At closing in November 2021, the transaction featured a funding period whereby the Issuer could contribute loans to the pool up to the expected maximum balance of $500.0 million. The pool was originally intended to be funded within the first year with an allowable six-month extension option. Although the Issuer did not fund the pool within the originally expected time frame, the 100% funding target was reached with the July 2023 remittance when the trust reached a balance of $496.6 million, representing 99.3% of the originally planned $500 million pool balance. The transaction now pays sequentially. The fully funded transaction is concentrated by property type with office, multifamily, and industrial properties representing 23.9%, 22.9%, and 19.2% of the current pool balance, respectively.

DBRS Morningstar notes an elevated risk profile for the Westview loan (Prospectus ID#12; 7.9% of the pool), which is secured by a 100,182-square foot (sf) office building in Austin, adjacent to the Texas State Capitol. In 2018, the subject property underwent a $32.0 million capital expenditure program to modernize the exterior, add 75,000 sf of space, and renovate and install creative office space. As of the June 2023 reporting, the subject was 92.4% occupied, which remains in line with the occupancy rate at the loan’s contribution to the trust. As noted at issuance, the largest tenant was WeWork, which occupied three floors at the subject, accounting for 46.3% of the net rentable area (NRA) with a lease expiry in January 2032. In August 2023, the borrower secured an agreement with WeWork to modify its lease, which will allow the borrower to recapture and then re-lease one of WeWork’s three floors (15.4% of the NRA). In exchange, the borrower has agreed to an 18-month base rent reduction of 10% or approximately $188,000 annually. In early November 2023, WeWork filed for Chapter 11 bankruptcy and in those filings identified approximately 70 leases it has requested to cancel as part of the bankruptcy proceedings. The bulk of the leases to be rejected are in New York and California—no leases in Austin or elsewhere in Texas have been included in any public filings or notices to date.

WeWork has a total of eight locations in the Austin metropolitan statistical area (including the subject), and the June 2023 asset summary report provided by the servicer noted the subject property is one of the top performers in the Austin market. The tenants at the subject WeWork location are satellite offices of larger companies, most of which signed leases of longer than six months duration. The WeWork lease was structured with a $3.5 million guarantee for the first six years, which declined to $2.0 million thereafter to the end of the lease in 2032. In addition, there is a $1.5 million letter of credit (LOC) that reduces to $1.0 million in February 2025. The guarantee wasn’t of high value before the bankruptcy filing and is now even less valuable; DBRS Morningstar has requested confirmation of the status of the LOC, but the bankruptcy filing has likely affect that credit as well.

The loan reported net cash flow (NCF) of $3.8 million for the trailing 12 months ended June 30, 2023, compared with the DBRS Morningstar NCF of $2.9 million. When the renegotiated WeWork lease is factored in, the NCF and occupancy rate are expected to decline to $3.7 million and 77.0%, respectively. There is marginal rollover risk with only one tenant, representing 5.9% of the NRA, having a lease expiration in the next 12 months. According to a Q3 2023 Reis report, the Austin central business district submarket reported a vacancy rate of 24.5%, which has increased from the 22.5% rate in the previous quarter. WeWork is currently paying $35.63 per square foot (psf) at the subject property while the Q3 2023 Reis report notes an effective rent of $35.90 psf, limiting any upside rent potential as the borrower re-leases the fourth floor.

Given the uncertainty surrounding the future of WeWork and the softening submarket conditions, the loan was analyzed with a stressed scenario to increase the expected loss, which was nearly three times the deal average in the model output.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
The special servicer cannot pursue a real estate owned (REO) recovery strategy. The Issuer is prohibited from acquiring REO assets because of the inclusion of a non-U.S. entity in the sponsorship, which cannot hold real interest in U.S. equity without triggering tax implications. This limit on resolutions could have an adverse outcome on loss severity for an impaired asset.

There were no Environmental or 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) at https://www.dbrsmorningstar.com/research/416784.

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 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 the 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 CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0 (https://www.dbrsmorningstar.com/research/422859)
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 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].