Morningstar DBRS Downgrades Credit Ratings on All Classes of GSCG Trust 2019-600C

On July 23, 2024, Morningstar DBRS updated the press release below to provide additional clarity on the transaction.

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage-Pass-Through Certificates, Series 2019-600C issued by GSCG Trust 2019-600C as follows:

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

The trend on Class A was changed to Negative. All other remaining classes now have a credit rating that generally does not carry a trend in commercial mortgage-backed securities (CMBS).

All credit ratings have been removed from Under Review with Negative Implications where they had been placed on April 15, 2024, as part of Morningstar DBRS' review of transactions secured by office properties within its North American commercial mortgage-backed securities single-asset/single-borrower (NA CMBS SASB) portfolio. The review was prompted by Morningstar DBRS' view that a shift in the use and demand for office space has been observed in the last few years. Amid the increase in remote work and hybrid schedules, tenant demand in urban markets, such as those most frequently represented in the NA CMBS SASB space, has been the most resilient for those higher-quality buildings that offer extensive amenity packages and are located close to transportation hubs with other nearby draws for commuters and city dwellers alike. These trends are expected to be sustained in the long term and their ripple effects of increased tenant improvement costs, capital improvement expectations, and decreased demand for some markets and neighborhoods will continue to influence investment activity for the office sector as a whole. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024.

At the conclusion of the April 2024 review, several transactions, including the subject transaction, remained Under Review with Negative Implications. This generally reflected the existence of evolving factors for those credits for which Morningstar DBRS identified a need for more information to be gathered to inform the analysis. With this review of the subject transaction, Morningstar DBRS has resolved the Under Review with Negative Implications status. The full details of the credit rating actions and ratings rationale are outlined below.

The credit rating downgrades reflect Morningstar DBRS' increased loss expectations driven by the significantly lower value of the asset since its transfer to special servicing. The underlying loan, which is secured by an office property in San Francisco, has been in special servicing since March 2023. The servicer's April 2024 reporting showed an updated appraisal dated February 2024, which valued the property at $124 million, representing a 32% decline from the April 2023 appraisal, and a 43% decline from the Morningstar DBRS value derived when credit ratings were assigned in 2020. In its analysis, Morningstar DBRS used a liquidation scenario to determine recoverability in an eventual disposition. The liquidation scenario, which is based on the February 2024 appraised value and takes into account outstanding advances and cumulative ASER interest, suggests losses could be realized through the Class B certificate, and forms the basis of the downgrades to C (sf) for Classes B through G. The credit rating downgrade on Class A is reflective of the significant credit deterioration throughout the capital stack with minimal credit support remaining in a liquidation scenario. Morningstar DBRS' credit ratings are also constrained by unpaid interest, for which there is minimal tolerance at high investment-grade levels. As of the June 2024 remittance, all classes aside from Class A are being shorted interest. Morningstar DBRS revised the trend on Class A to Negative to reflect the potential for further credit deterioration should the appraised value decline again, as well as increased propensity for interest shortfalls.

Prior to the default, Morningstar DBRS was monitoring the loan for increased credit risks tied to the largest tenant, WeWork, and noted there were mitigating factors as of May 2022 in the high in-place debt service coverage ratio, the lack of delinquency on the underlying loan, and the expectation as of early 2022 that San Francisco office demand could stabilize in the moderate term as return to office trends continued to evolve. Following the transfer to special servicing, Morningstar DBRS placed all its credit ratings for the subject transaction Under Review with Negative Implications (for additional information on that credit rating action, please see the press release dated May 2, 2023, on the Morningstar DBRS website). The first appraisal obtained by the special servicer, dated April 25, 2023, and first reported with the July 2023 remittance, valued the property at $183 million. In July 2023, Morningstar DBRS downgraded the credit ratings on seven of the eight rated classes (all but Class A) and placed Negative trends on all outstanding credit ratings above CCC (sf) to reflect the potential for further credit rating downgrades (for additional information on that credit rating action, please see the press release dated July 27, 2023, on the Morningstar DBRS website).

The fixed-rate five-year $240.0 million loan is secured by a Class A, LEED Gold-certified office building totaling 359,154 square feet (sf) in the North Financial District of San Francisco. WeWork was the largest tenant in place at issuance, with more than 50% of the net rentable area (NRA), on a lease through March 2035. The sponsor at issuance, Ark Capital Advisors, LLC (Ark), is a joint venture among Ivanhoe Cambridge, the Rhone Group, and The We Company. The We Company (WeCo) is the owner of approximately 80% of Ark and is also the parent company of WeWork.

The loan transferred to the special servicer in March 2023 following WeWork halting its rental payments, at which point the borrower defaulted on its March 2023 debt service payment. As of the June 2024 remittance, the loan remains delinquent. Following the initial breakdown of lease negotiations with WeWork in late 2023, the borrower stated that it was unwilling to inject additional equity and eventually agreed to a consensual receiver appointment in November 2023. The loan is not expected to repay at its September 2024 maturity and workout discussions are ongoing.

As noted previously, WeWork stopped paying rent in March 2023 and sought a lease modification from the borrower. Effective March 2024, major terms of the lease modification include downsizing to a footprint of 43,520 sf over three floors; an initial six-year lease term with two five-year renewal options; and contractual base rent of $50.00 psf with 2.0% annual rent steps. At issuance, WeWork's in-place rental rate was $87.91 psf. In addition, there is a percentage rent clause that stipulates a 50% revenue split above $5.5 million until the landlord achieves $65.00 psf annual rent, at which point the revenue split is 75% and 25% in favor of WeWork. WeWork has also remitted past due rents. At issuance, an affiliate of WeCo, We Work Companies, LLC, provided a guaranty in the amount of $44.1 million that was to remain in place through the duration of the WeWork lease. Morningstar DBRS has inquired about the status of this guaranty following the conclusion of the lease modification; however, no answer has been provided as of the date of this press release. While the conclusion of lease negotiations is a positive development relative to the alternative of WeWork rejecting the lease outright, the amended terms and downsizing, in addition to upcoming lease expiration on two floors, will result in occupancy and cash flow declines.

According to the rent roll dated March 2024, the subject was 55.0% occupied at an average rental rate of $51.59 psf. The largest tenants include WeWork (25.0% of the NRA; lease expiries in September 2024 and December 2030) and Cardinia Real Estate (11.6% of the NRA; lease expiry in May 2025). Leases representing 36.8% of the NRA have already expired or are scheduled to expire over the next 12 months, inclusive of Cardinia Real Estate and floors two and three of WeWork. Given the already high vacancy at the subject, this near-term rollover is considered concentrated and a noted concern. According to the June 2024 loan-level reserve report, $10.8 million was held across reserves, including $7.5 million in a lockbox reserve and approximately $2.5 million in replacement reserves.

The February 2024 appraisal valued the property at $124 million, reflective of a 32% decline from the April 2023 appraised value of $183.0 million and a 66.5% decline from the issuance appraisal value of $370.0 million. Morningstar DBRS points to the increased vacancy rate at the subject, attributable to the updated lease terms for the WeWork space and the associated lease-up costs for that space combined with the general distress of the San Francisco office market to be driving factors in the property's value deterioration.

In its analysis, Morningstar DBRS used a liquidation scenario based on the most recent appraised value to determine recoverability. As previously noted, Morningstar DBRS projects losses into the Class B certificate, given the current loan exposure. As of the June 2024 remittance, interest shortfalls totaling $3.7 million were reported, with payments shorted all the way up through the Class B certificate, previously rated at AA (sf). Although the receiver continues its stabilization efforts, backfilling the high volume of vacant space at the property is likely to be costly and take time, increasing the bonds' exposure and risk. Given the continued declines in value and ongoing delinquency, the bonds also remain at risk of untimely interest. Should these concerns materialize, Class A may be subject to future downgrade.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428798).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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.

The credit ratings of this transaction are highly subject to the asset's liquidation value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are monitored.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428799)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

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

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205)

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.