Fitch to Rate GS Mortgage Securities Corporation Trust
Fitch expects to rate the transaction and assign Rating Outlooks as follows:
--\\$100,000,000a class A notes 'AAAsf'; Outlook Stable;
--\\$100,000,000ab class X-A notes 'AAAsf'; Outlook Stable;
--\\$82,750,000ab class X-B notes 'A-sf'; Outlook Stable;
--\\$53,750,000a class B notes 'AA-sf'; Outlook Stable;
--\\$29,000,000a class C notes 'A-sf'; Outlook Stable;
--\\$42,000,000a class D notes 'BBB-sf'; Outlook Stable;
--\\$65,000,000a class E notes 'BB-sf'; Outlook Stable;
--\\$60,000,000a class F notes 'B-sf'; Outlook Stable.
(a) Privately placed pursuant to Rule 144A.
(b) Notional amount and interest-only.
The expected ratings are based upon information provided as of Feb. 17, 2016.
The GSMS 2016-RENT Commercial Mortgage Pass-Through Certificates represent the beneficial interest in a trust secured by a loan collateralized by portfolio of multifamily properties located in San Francisco, CA. The whole loan consists of: one five-year, fixed-rate, interest-only \\$480 million mortgage loan secured by the fee interests in 61 multifamily properties with a total of 1,726 rent controlled units. As of January 2016, the portfolio has a current vacancy rate of approximately 5.4% including units down for renovation.
The whole loan is part of a split loan structure with an aggregate outstanding principal balance of \\$480,000,000. The note structure consists of trust note A-1 (\\$100,000,000), non-trust note A-2 (\\$65,125,000), non-trust note A-3 (\\$65,125,000) and trust note B (\\$249,750,000). Notes A-1, A-2 and A-3 are pari passu with each other. Note A-1 and Note B are included in this trust. It is expected that notes A-2 and A-3 will be contributed to future securitization.
The sponsor is a joint venture between Veritas Investments and affiliates of Baupost Group. Veritas is the operating partner of the joint venture. Veritas Investments currently owns over 4,000 units across 167 buildings making it the largest institutional multifamily landlord in San Francisco. The properties in the portfolio were acquired by Veritas in 2011. The Baupost Group is a Boston-based value-oriented hedge fund founded in 1982 with over \\$28.0 billion under management.
KEY RATING DRIVERS
Below Market Rents. All the units in the portfolio are subject to rent-control restrictions. As a result of these restrictions, approximately 89% of the units have current rents below market rent levels. In the aggregate, in-place rents are approximately 28% below market rents as determined by the appraisal. Realizing market rents as determined by the appraisal would result in an increase in potential rent of approximately \\$20 million.
Strong Multifamily Market. The properties are all located in the tight San Francisco multifamily market. The 61 properties are located in several central San Francisco neighborhoods: Nob Hill; Mission; Pacific Heights; Downtown San Francisco; Russian Hill; and the Marina District. Per Reis, Inc.'s 4Q15 report, the average asking rent in the overall San Francisco market is \\$2,556 and the average vacancy rate is 4.1%. Reis is forecasting annualized asking rent growth of 4.7%.
High Fitch Trust Leverage. Fitch's stressed DSCR and loan-to-value (LTV) for the trust component and the companion loans are 0.84x and 103.6% based on an 8.56% discount to current net cash flow and an 8.00% refinance constant and a 7.00% cap rate, respectively.
Collateral Quality: Fitch assigned the portfolio a property quality grade of "B+". The units are being renovated as they become vacant. Since acquiring the assets, Veritas has spent \\$32.9 million in capital improvements, including \\$22.7 million on unit conversions and renovations and \\$10.2 million on base-building upgrades.
Additional Debt. The total debt includes mezzanine financing not included in the trust totaling \\$196,500,000.
Geographic Concentration. The properties are all located in San Francisco, CA, which has a high degree of seismic activity. The seismic reports determined that none of the properties have a scenario expected loss (SEL/PML) exceeding 20%, and the aggregate portfolio SEL/PML is 15%. The properties do not have specific seismic coverage. For more information please see "Seismic Reports".
Portfolio Performance. The portfolio has achieved cash flow growth while taking units offline for renovation. Year-end 2014 net cash flow increased 19% over 2013. The trailing 12 months (TTM) to November net cash flow increased 9.75% from year-end 2014.
RATING SENSITIVITIES
Fitch found that the property could withstand a 68.2% decline in appraised portfolio value and an approximate 49.6% decline in Fitch's implied net cash flow prior to experiencing \\$1 of loss to the 'AAAsf' rated class. Fitch performed several stress scenarios in which the Fitch net cash flow (NCF) was stressed. Fitch determined that a 40.2% reduction in Fitch's implied NCF would cause the notes to break even at a 1.0x debt service coverage ratio (DSCR), based on the actual debt service.
Fitch evaluated the sensitivity of the ratings for class A and found that a 7% decline in Fitch's implied NCF would result in a one-category downgrade, while a 39% decline would result in a downgrade to below investment grade.
The Rating Sensitivity section in the presale report includes a detailed explanation of additional stresses and sensitivities. Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report. The presale report is available to all investors on Fitch's web site 'www.fitchratings.com'.
DUE DILIGENCE USAGE
Fitch was provided with third-party due diligence information from Ernst & Young LLP. The third-party due diligence information was provided on ABS Due Diligence Form-15E and focused on a comparison and re-computation of certain characteristics with respect to the mortgage loan and related mortgaged properties in the data file. Fitch considered this information in its analysis, and the findings did not have an impact on our analysis.
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