Morningstar DBRS Downgrades Credit Ratings on Four Classes of GS Mortgage Securities Trust 2018-GS10, Changes Trends on Four Classes to Negative From Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2018-GS10 issued by GS Mortgage Securities Trust 2018-GS10 as follows:
 
-- Class X-D to BB (low) (sf) from BBB (sf)
-- Class E to B (high) (sf) from BBB (low) (sf)
-- Class F to CCC (sf) from BB (low) (sf)
-- Class G-RR to C (sf) from B (low) (sf)
 
In addition, Morningstar DBRS confirmed the following credit ratings:
 
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
 
Morningstar DBRS changed the trends on Classes C, D, E, and X-D to Negative from Stable. All other trends are Stable, with the exception of Classes F and G-RR, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades on Classes E, F, X-D, and G-RR are reflective of Morningstar DBRS' increased loss projections, driven by the two loans in special servicing: GSK North American HQ (Prospectus ID#1, 9.5% of the pool) and Capital Complex (Prospectus ID#25, 1.1% of the pool). Since the last credit rating action, both loans, which were in special servicing at the time of the last credit rating action, received new appraisals exhibiting significant declines in value. Morningstar DBRS' analysis includes liquidation scenarios for both loans, resulting in total implied losses approaching $28 million. The projected loss would fully reduce the unrated Class H-RR certificate and partially reduce the Class G-RR certificate, eroding credit support to the junior bonds in the transaction. Outside of loans in special servicing, Morningstar DBRS also notes 1000 Wilshire (Prospectus ID#2, 8.2% of the pool) as a loan of concern given its performance deterioration and upcoming maturity date in March 2025. This loan and the potential for future value declines for the assets in special servicing are the primary drivers of the Negative trends on Classes C, D, E, and X-D.

As of the July 2024 remittance, all 33 of the original loans remain in the pool with an aggregate principal balance of $792.1 million, representing a nominal collateral reduction of 2.3% since issuance. There are eight loans, representing 18.7% of the pool, on the servicer's watchlist being monitored for low debt service coverage ratios (DSCRs), occupancy declines, and deferred maintenance. Excluding collateral that has been fully defeased, the pool is most concentrated by loans that are secured by office and retail properties, representing 34.5% and 23.8% of the pool balance, respectively. Most of the loans secured by office properties in this transaction continue to perform as expected, based on the most recent financials available. However, Morningstar DBRS has a cautious outlook on this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords' efforts to backfill vacant space, and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties, and, in certain cases, applied stressed loan-to-value (LTV) ratios for loans exhibiting performance concerns.

Morningstar DBRS continues to closely monitor the largest loan in the pool, GSK North American HQ, following the decision by the property's single tenant, GlaxoSmithKline (GSK), to vacate its space in Q1 2022. The loan transferred to special servicing for imminent maturity default in November 2022. During workout negotiations, the borrower had requested approval to terminate GSK's lease, scheduled to expire in 2028, and requested a maturity extension prior to the June 2023 maturity date; however, these proposals were rejected and the borrower agreed to a deed in lieu of foreclosure. The July 2024 servicer commentary indicates that the foreclosure sale has been completed and a receiver is in place. Per the most recent appraisal dated April 2024, the property is valued at $76.7 million, down from the August 2023 value of $89.3 million and the issuance appraised value of $132.7 million.

The subject loan is secured by a Class A office complex in Philadelphia's Navy Yard submarket. The property was built-to-suit for GSK at a cost of $80.0 million in 2013, when GSK executed a 15-year lease through September 2028 with no termination options. Although the space is dark, the former tenant will continue to make its monthly rental payments until September 2028. The loan is structured with a cash flow sweep that was activated as GSK went dark. According to the July 2024 reserve report, approximately $9.0 million was being held in the cash management account and $1.0 million held in a tenant reserve. Given the property's single-tenant nature, cash flow has historically been stable, although Morningstar DBRS expects there will be no incoming revenue once the lease expires, unless the receiver is able to backfill the dark space. Based on a Q1 2024 Reis report, office properties in the South Philadelphia submarket reported a vacancy rate of 2.6%. The developers of Philadelphia's Navy Yard have announced a 20-year multi-billion-dollar plan to revitalize and redevelop the Navy Yard site, which could potentially bring new commercial activity to the area and improve the asset's desirability in the long term.

Although there are mitigating factors to offset the subject's vacancy, including an in-place lease to 2028, cash reserves, and stable submarket fundamentals, Morningstar DBRS expects that the loan will take a loss at resolution given the declined value, lack of amortization, and lack of liquidity for vacant office assets in the current environment. With this review, Morningstar DBRS analyzed the loan with a liquidation scenario based on a haircut to the most recent appraised value, indicating an implied loss severity in excess of 30%.

The second-largest loan in the pool, 1000 Wilshire, is also a noted loan of concern, though it is not currently on the servicer's watchlist or in special servicing. The loan is secured by a 477,774-square-foot Class A office building in Los Angeles. The subject has experienced occupancy declines over the last several years and was 74.5% occupied according to the December 2023 rent roll. Media sources indicate that the largest tenant, Wedbush Securities (Wedbush; 21% of the net rentable area, lease expiry in December 2025), has marketed the entirety of its space for sublease, although Morningstar DBRS has not located any listings for the space online. Morningstar DBRS has inquired to the servicer about the sublease. Wedbush's lease, which is currently scheduled to expire nine months after the loan's March 2025 maturity, has extension options remaining, though Morningstar DBRS believes it is likely the tenant will not renew.

According to the most recent financials, the subject reported a YE2023 DSCR of 2.50 times and net cash flow (NCF) of $5.6 million. Although this represents an increase from the YE2022 reported figures, performance remains below issuance expectations. At issuance, Morningstar DBRS derived an NCF of $8.8 million. According to a Reis report from Q1 2024, Los Angeles' downtown submarket reported a vacancy rate of 17.1%, up from the Q1 2023 figure of 16.1%. At issuance, Morningstar DBRS shadow-rated the loan because of its strong historical occupancy and high debt service coverage. With this review, Morningstar DBRS has removed the shadow rating on this loan given sustained occupancy and cash flow declines relative to issuance expectations. Given these factors, combined with the loan's near-term maturity and the potential departure of the largest tenant, Morningstar DBRS views this loan as at increased risk of default. Morningstar DBRS analyzed this loan with an elevated POD and stressed LTV, which resulted in an expected loss (EL) above the weighted-average pool EL.

Two loans¿Aliso Creek Apartments (Prospectus ID#3, 7.9% of the pool balance) and Marina Heights State Farm (Prospectus ID#11, 3.4% of the pool balance)¿were shadow-rated investment grade by Morningstar DBRS at issuance. With this review, Morningstar DBRS confirmed that the performance of these two loans remains consistent with investment-grade loan characteristics.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Classes X-A, X-B, and X-D are interest-only (IO) certificates that reference 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 credit rating assigned to Class B materially deviates from the credit rating implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk. Excluding the loans of concern as noted above, the remaining loans in the pool continue to exhibit stable performance in line with Morningstar DBRS' expectations at issuance. In addition, there is no upcoming maturity risk outside of the 1000 Wilshire loan.

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.

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 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.

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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- 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.

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