Morningstar DBRS Downgrades Credit Ratings on Nine Classes of GS Mortgage Securities Corporation Trust 2019-GC40, Changes Trends on Eight Classes To Negative From Stable

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on nine classes of Commercial Mortgage Pass-Through Certificates, Series 2019-GC40 issued by GS Mortgage Securities Corporation Trust 2019-GC40 as follows:

-- Class B to A (high) (sf) from AA (low) (sf)
-- Class X-B to BBB (high) (sf) from A (high) (sf)
-- Class C to BBB (sf) from A (sf)
-- Class D to BB (sf) from BBB (high) (sf)
-- Class X-D to B (sf) from BBB (sf)
-- Class E to B (low) (sf) from BBB (low) (sf)
-- Class X-F to CCC (sf) from BB (high) (sf)
-- Class F to CCC (sf) from BB (sf)
-- Class G-RR to C (sf) from B (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-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)

Morningstar DBRS also changed the trends on Classes A-S, B, C, D, E, X-A, X-B, and X-D to Negative from Stable. Classes X-F, F, and G-RR do not carry a trend, given the CCC (sf) or lower credit rating. The trends on all remaining classes are Stable.

The credit rating downgrades reflect Morningstar DBRS' increased loss expectations for the pool, primarily attributed to the 250 Livingston loan (Prospectus ID#2, 9.8% of the pool), a watchlisted loan where the largest tenant that occupies majority of the property will be vacating the property. The loan is discussed further below. Since the last credit rating action, three loans, representing 5.7% of the pool balance, transferred to special servicing. Morningstar DBRS' loss projections for 250 Livingston and two of the three special serviced loans totaled $41.3 million, which would wipe out the entire balance of Classes H-RR and G-RR and nearly 30% of Class F. The Negative trends reflect the potential for further value decline for these loans, given the declining performance trends. In addition, the pool has a high concentration of loans backed by office properties with a number of those loans exhibiting performance declines from issuance coupled with significant upcoming rollover risk.

The credit rating confirmations on the remaining classes are reflective of the otherwise overall steady performance of the remaining loans in the pool as exhibited by a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.29 times (x) and a WA debt yield of higher than 10.0% based on the most recent year-end financials. As of the July 2024 remittance, 32 of the original 35 loans remain in the pool, with an aggregate principal balance of $762.5 million, reflecting a 16.6% collateral reduction since issuance. The concentration of loans on the servicer's watchlist has materially increased to 31.4%. The pool is most concentrated by loans that are secured by office properties, representing 38.2% of the pool balance. 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 penalties, and, in certain cases, applied stressed loan-to-value ratios for loans exhibiting performance concerns. The resulting WA expected loss for these loans is about 100 basis points higher than the pool average.

As noted above, a primary driver of Morningstar DBRS' loss projections is 250 Livingston Street, a watchlisted loan that is secured by a 370,305-square-foot (sf), mixed-use commercial and residential building located in Downtown Brooklyn. The subject note is pari passu with BMARK 2018-B12, which is also rated by Morningstar DBRS. The New York City Human Resources Administration occupies the entire office portion of the property (92.0% of the property's net rentable area) on a lease through August 2030. However, the tenant has exercised its termination option and plans to vacate the building in August 2025. As a result, a cash flow sweep was initiated where the funds will be used to re-lease the space. The re-leasing efforts will likely be challenging given the soft office submarket with CB Richard Ellis reporting a Q2 2024 vacancy rate vacancy rate of 19.1% with asking rents of $54.55 per sf (psf) for downtown Brooklyn. While an updated appraisal has not yet been made available, Morningstar DBRS believes the property value has deteriorated significantly given potential of the building going dark, as well as its age and property condition and the current office landscape. Morningstar DBRS derived a dark value based on the market rental rate, tenant improvement costs of $60 psf for new leases and $30 psf for renewal leases, a stabilization period of two years, and a 9.0% stressed capitalization rate, which is on the higher end of the range used by Morningstar DBRS for office properties. The resulting dark value was approximately $60.0 million. Morningstar DBRS also gave credit to the cash flow sweep reserves. Morningstar DBRS' liquidated the loan from the trust, resulting in an implied loss severity in excess of 30.0%.

The second largest loan in special servicing, 57 East 11th Street (Prospectus ID#15, 2.6% of the pool) is secured by a 64,460-sf office property with ground floor retail within the Greenwich Village submarket of New York. The property was built in 1903 and was most recently renovated in 2018. The subject note is pari passu with GSMS 2019-GC39 and BMARK 2019-B11 (rated by Morningstar DBRS).The $55.0 million interest-only (IO) whole loan transferred to special servicing in February 2024 because of payment default. The property was previously fully leased to WeWork Inc. (WeWork) on a lease through October 2034; however WeWork filed for bankruptcy and rejected the lease at the subject property in November 2023. A receiver was recently appointed while the special servicer continues to pursue foreclosure. An updated appraisal as of March 2024 valued the property at $17.8 million, a -77.0% variance from the issuance value of $76.0 million. Given the severe as-is value decline, lack of leasing activity, and general lack of liquidity for this property type, Morningstar DBRS analyzed this loan with a liquidation scenario, resulting in a loss severity in excess of 80.0%.

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 factor(s) 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, X-D, and X-F are 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 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 (July 17, 2023).

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