Morningstar DBRS Confirms Credit Ratings on All Classes of GS Mortgage Securities Corporation Trust 2017-FARM

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-FARM issued by GS Mortgage Securities Corporation Trust 2017-FARM:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class HRR at AA (sf)

All trends are Stable.

The credit rating confirmations reflect the overall performance of the transaction, which remains in line with Morningstar DBRS' expectations. The collateral property is nearly fully leased to an investment-grade tenant on a long-term lease that has staggered expiry dates that begin in 2032.

The collateral is a first-lien mortgage on the borrower's leasehold interest in the property known as Marina Heights State Farm, a 2.0 million-square-foot (sf) suburban office complex in Tempe, Arizona, that consists of five Class A buildings and two retail buildings. Completed between 2016 and 2017, the property was built by State Farm Mutual Automobile Insurance Company and its affiliates (collectively, State Farm) as part of an effort to consolidate small regional offices within the Greater Phoenix area into a single regional headquarters for the company's southwestern markets.

The property is on a 99-year ground lease with the Arizona Board of Regents (on behalf of Arizona State University), which began in 2013 and expires in August 2112. Ground rent payments have varying start dates based on the eighth anniversary of when a particular building was granted a certificate of occupancy, with commencement dates between 2023 and 2026. Because the ground lessor is a tax-exempt government agency, the property is exempt from property taxes.

Whole loan proceeds of $560.0 million, along with $375.7 million of cash and an imputed equity contribution of $22.5 million, financed the purchase of the property by a joint venture between the loan sponsors, JDM Partners LLC and Transwestern Investment Group, in a sale leaseback transaction from State Farm for a purchase price of approximately $930.0 million and total costs of $958.2 million (including closing costs and imputed equity). The trust consists of a $264.0 million participation in the whole loan, with the remaining $296.0 million of pari passu debt held outside the trust. Morningstar DBRS also rates two of the companion note commercial mortgage-backed securities transactions in GS Mortgage Securities Trust 2018-GS10 and Benchmark 2018-B4 Mortgage Trust. The interest-only fixed-rate loan has a 10-year anticipated repayment date (ARD) in January 2028, after which the loan would hyper-amortize until the final maturity date in January 2033.

As of the September 2024 rent roll, the property was 99.5% occupied, with State Farm accounting for 97.1% of the net rentable area (NRA). State Farm occupies space under several leases with varying expiration dates. Two of the leases, representing a combined 434,000 sf (21.4% of the NRA), are scheduled to expire during the loan's full term; only one of those leases, representing 2.3% of the total NRA, has an expiration prior to the ARD. State Farm actively occupies 1,247,911 sf (62.4% of the NRA) of their leased spaces and subleases approximately 718,183 square feet (35.9% of NRA) to Carvana. According to the servicer, Carvana has sublet approximately 43,000 sf to LPL Financial. The utilization rate for State Farm's occupied space is 96.8%, and no space is dark. According to Reis, for Q4 2024, the asking rental rate and effective rental rate for the Tempe submarket was $29.1 per square foot (psf) and $21.7 psf, respectively, compared with the property's average rental rate of $29.2 psf per the September 2024 rent roll.

According to the financial reporting for the trailing six (T-6) month period ended June 30, 2024, the office complex generated a Q2 2024 annualized net cash flow (NCF) of $58.8 million (a debt service coverage ratio (DSCR) of 2.90 times (x), compared with the YE2023 figure of $56.7 million (a DSCR of 2.81x) and the Morningstar DBRS NCF figure of $55.7 million (a DSCR of 2.78x). The year-over-year increase is primarily driven by scheduled rent escalations from State Farm of 2.0% each year. This was factored into the Morningstar DBRS NCF given State Farm is a long-term credit tenant and its rents were straight-lined through the term of the loan.

For purposes of this credit rating action, Morningstar DBRS maintained the valuation approach from the April 2024 review, which was based on a capitalization rate of 8.25% applied to the Morningstar DBRS NCF of $55.7 million derived at issuance. The Morningstar DBRS value represents a -24.7% variance from the issuance appraised value of $896.0 million. The resulting Morningstar DBRS loan-to-value ratio (LTV) was 83.0% compared with the LTV of 62.5% based on the appraised value at issuance. Morningstar DBRS maintained positive qualitative adjustments totaling 4.00% to reflect the portfolio's generally low cash flow volatility as a result of the long-term credit-tenant and high property quality.

The Morningstar DBRS credit rating assigned to Class HRR is higher than the result implied by the LTV sizing benchmarks by three or more notches. This variance is warranted given the sustained high occupancy driven by an investment-grade tenant on long-term, staggered leases with only a small percentage of NRA set to expire prior to the ARD.

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, or 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 (August 13, 2024; https://dbrs.morningstar.com/research/437781).

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 (February 28, 2025), https://dbrs.morningstar.com/research/448963

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.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

-- North American Single-Asset/Single-Borrower Ratings Methodology (February 28, 2025), https://dbrs.morningstar.com/research/448962
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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