DBRS Morningstar Downgrades Six Classes of GS Mortgage Securities Corporation Trust 2021-ROSS, Changes Trends on Nine Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) downgraded its credit ratings on six classes of the Commercial Mortgage Pass-Through Certificates issued by GS Mortgage Securities Corporation Trust 2021-ROSS as follows:

-- Class B to AA (sf) from AA (high) (sf)
-- Class C to A (high) (sf) from AA (low) (sf)
-- Class D to BBB (high) (sf) from A (low) (sf)
-- Class E to BB (low) (sf) from BBB (low) (sf)
-- Class F to B (low) (sf) from BB (low) (sf)
-- Class G to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)

DBRS Morningstar also changed the trends on all classes except Class G to Negative from Stable. Class G has a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings. The credit rating downgrades and trend changes reflect DBRS Morningstar’s deteriorated view of this transaction since the loan’s transfer to special servicing in May 2023.

The $691.0 million mortgage loan has a two-year initial term that matured in June 2023. While the loan was structured with three one-year extension options, subject to certain provisions, including spread increases and the purchase of a new interest rate cap, the borrower did not elect to execute its extension option and the loan transferred to special servicing in May 2023 for monetary default. The servicer reported that a replacement interest rate cap agreement was not purchased and the loan is currently unhedged. As noted at issuance, there is also a $150.0 million mezzanine loan in place, held outside of the trust. The mezzanine loan, which is securitized in a separate CMBS transaction, also transferred to special servicing in May 2023. Given the loan is in payment default and past its maturity date, DBRS Morningstar used a stressed analysis to determine the impact of a liquidation scenario, which is described in further detail below. The loan sponsor is a joint venture between U.S. Real Estate Opportunities I, L.P. (approximately 89% ownership) and an affiliate of Monday Properties (approximately 11% ownership).

Collateral for the trust consists of the fee-simple interest in seven Class A/Class B office properties totaling approximately 2.1 million square feet in Arlington, Virginia. As of May 2023, the collateral was 75.0% occupied with an average rental rate of $50.57 per square foot (psf), slightly below the occupancy rate of 78.2% at issuance. The portfolio’s largest tenant is the U.S. Department of State (16.1% of the portfolio’s net rentable area (NRA)), with a lease expiration in 2034. No other single tenant occupies more than 6.0% of the portfolio’s NRA or represents more than 8.0% of the gross rents. Tenant rollover during the fully extended loan term totals only 16.7% of NRA and, in 2024, tenants representing just 3.7% of NRA are scheduled to roll. As of Q3 2023, Reis reported that the Rosslyn/Courthouse submarket had a vacancy rate of 20.8% and average asking rents of $36.42 psf. Over the next five years, Reis projects modest increases in asking rents, with vacancy expected to remain flat at approximately 21.0%.

Per the most recent financials, the loan reported a YE2022 net cash flow (NCF) of $52.6 million (equating to a debt service coverage ratio of 1.08 times), slightly below the YE2021 NCF of $55.7 million but still above the DBRS Morningstar NCF of $44.6 million derived at issuance. Following the subject loan’s transfer to special servicing, a cash sweep was initiated. According to the servicer, the cash management account had an accumulated balance of $7.0 million as of July 2023. An additional $7.7 million is held across tenant and leasing reserves as of November 2023. The loan is delinquent, having missed the August 2023 payment and all subsequent payments. As of the November 2023 remittance, cumulative principal and interest advances total $19.9 million. The servicer has noted that they are dual tracking foreclosure as well as a loan recapitalization or modification. Updated appraisals have been ordered and are still being finalized as of the date of this press release.

Although the collateral’s performance remains in line with DBRS Morningstar’s issuance expectations, there is increased concern regarding the borrower’s commitment to the asset and desire to resolve the default. In addition, upward pressure on office capitalization rates in the last year, along with continued softening of the submarket, indicate the risk for this loan has substantially increased. As such, DBRS Morningstar conducted a recoverability analysis based on a newly derived DBRS Morningstar value, which suggests downward pressure on all but the most senior class, supporting the downgrades. In its analysis for this review, DBRS Morningstar derived a stressed value of $525.9 million by applying a 10.0% capitalization rate to the YE2022 NCF of $52.6 million. This value represents a variance of -55.1% from the issuance appraised value of $1.17 billion and a variance of -14.5% from the original DBRS Morningstar value of $615.0 million derived at issuance. The updated DBRS Morningstar value implies a loan-to-value ratio (LTV) of 131.4% on the A note debt, as compared with the LTV of 59.1% based on the issuance appraised value. DBRS Morningstar maintained its positive qualitative adjustments to the final LTV sizing benchmarks, totaling 3.5% to account for limited cash flow volatility and property quality. The Negative trends reflect the potential for further value deterioration as the new appraisals are finalized, as well as the potential for a prolonged workout, accruing advances and interest shortfalls.

The Class A, A-Y, A-Z, and A-IO certificates (the CAST certificates) can be exchanged for other classes of CAST certificates and vice versa, as described in the offering memorandum.

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).

Class A-IO 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 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

DBRS Limited
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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)

-- 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, 2023; https://www.dbrsmorningstar.com/research/425081)

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].