Morningstar DBRS Changes Trends on Five Classes of GS Mortgage Securities Trust 2019-GC42 to Negative from Stable, Confirms Credit Ratings on All Classes

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-GC42 issued by GS Mortgage Securities Trust 2019-GC42 (the Issuer) as follows:

-- 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)
-- Class B at AA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

In addition, Morningstar DBRS changed the trends on the Class D, Class E, Class F-RR, Class G-RR, and Class X-D certificates to Negative from Stable. All other classes continue to have Stable trends.

The Negative trends reflect Morningstar DBRS' view that there are increased risks in the pool's nearly 40% concentration of loans backed by office properties. The most concerning of these are two specially serviced loans in the 222 Kearny Street loan (Prospectus ID#21, 2.4% of the pool balance), which are backed by a San Francisco property that transferred to special servicing in July 2023 following performance declines, and the Midland Office Portfolio loan (Prospectus ID#25, 1.8% of the pool balance), backed by an office complex in Midland, Texas, which transferred to special servicing in August 2023, also because of performance declines. Given the outsized stress for the respective markets amid the changing dynamics for the office sector, Morningstar DBRS believes a disposition is a likely outcome in both cases and as such, analyzed liquidation scenarios for both loans, which resulted in loss severities of more than 45% and 20%, respectively.

Although there are sector shifts in place that Morningstar DBRS believes are increasing the risks for the office sector as a whole, in general, the other loans secured by office properties are performing as expected, most recently reporting a weighted-average (WA) debt service coverage ratio (DSCR) of 2.71 times (x) and a WA debt yield (DY) of 10.4%. There were five additional office loans stressed in the analysis to reflect property-specific and/or market concerns, which could lead to increased risks over the loan terms and those were analyzed with stressed loan-to-value ratios (LTVs) and/or elevated probability of defaults to increase the expected loss (EL) at the loan level, as applicable. The resulting WA EL for the office loans in the pool was approximately 30% higher than the pool's WA expected loss.

Most notably, the 19100 Ridgewood loan (Prospectus ID#4, 5.5% of the pool balance) is secured by a two-building, 618,017-sf office property in San Antonio leased solely to Marathon Petroleum Corporation through May 2029, just short of the loan's scheduled maturity in September 2029. Currently, one of the buildings, accounting for about 30% of the net rentable area (NRA), is subleased through January 2026 to an investment-grade-rated tenant, EOG Resources, Inc., with one renewal option extending the lease term to May 2029. Morningstar DBRS also notes that additional space is listed as available for sublease, suggesting that the tenant's demand for space continues to decrease. As such, it is much less likely that the tenant will renew the entirety of the space upon lease expiration, given the compression in the Northeast submarket, which is facing challenges as supply continues to outpace demand and vacancy rates hover around 20% as of Q2 2024, according to Reis. For this review, Morningstar DBRS analyzed this loan with a stressed LTV, resulting in an expected loss that is more than 3.5 times the pool average.

The credit rating confirmations reflect the overall stable performance of the transaction, evidenced by the strong WA DSCR of 2.59 times (x) and a healthy WA DY of 10.9%, based on the most recent financial reporting available. While the pool has a meaningful concentration of loans secured by office properties, representing the largest property type concentration, two of these loans, representing 8.6% of the pool balance, are shadow-rated investment-grade, benefiting from long-term leases with investment-grade-rated tenants. As of the August 2024 remittance, 35 of the original 36 loans remain in the pool. The initial pool balance of $1.06 billion has been reduced by 5.9% to $1.0 billion, with no realized losses to the trust. Four loans, representing 11.6% of the pool balance, are on the servicer's watchlist.

At issuance, Morningstar DBRS shadow-rated four loans, representing 15.6% of the pool balance. Two of these, Moffet Towers II Buildings 3 & 4 (Prospectus ID#1, 6.6% of the pool) and 30 Hudson Yards (Prospectus ID#23, 2.0% of the pool), are backed by office properties leased to investment-grade-rated tenants on long-term leases. The other two shadow-rated loans, Woodlands Mall loan (Prospectus ID#6, 5.0% of the pool) and Grand Canal Shoppes loan (Prospectus ID#24, 2.0% of the pool), are backed by strong-performing retail properties located in desirable markets. Morningstar DBRS confirmed that all four loans continue to exhibit investment-grade loan characteristics as part of this review.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 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.

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, Inc.
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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.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 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, 2024; https://dbrs.morningstar.com/research/438283)

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

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