DBRS Assigns Provisional Ratings to Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-BNK3 (the Certificates), issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-D at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)

All trends are Stable.

Classes X-D, D, E and F will be privately placed.

The Class X-A, X-B and X-D balances are notional. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificates’ positions within the transaction payment waterfall when determining the appropriate ratings.

On January 17, 2017, DBRS released a Request for Comment on its proposed methodology, “Rating North American CMBS Interest-Only Certificates.” If this methodology is adopted without changes, DBRS indicates that potential rating actions could be either downgrades or confirmations to IO certificates. Please refer to the January 17, 2017, DBRS press release for further details on the proposed methodology.

The collateral consists of 63 fixed-rate loans secured by 94 commercial and multifamily properties, comprising a total transaction balance of $977,092,638. The transaction has a sequential-pay pass-through structure. The trust assets contributed from two loans, representing 7.2% of the pool, are shadow-rated investment grade by DBRS. Proceeds for each shadow-rated loan are floored at their respective rating within the pool. When 7.2% of the pool has no proceeds assigned below the rated floor, the resulting pool subordination is diluted or reduced below that rated floor. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, no loans had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Twenty-four loans, representing 49.7% of the pool, have a DBRS Refinance (Refi) DSCR below 1.00x; however, these credit metrics are based on whole-loan balances. Two of the pool’s loans with DBRS Refi DSCRs below 0.90x, 85 Tenth Avenue and Potomac Mills, which total 7.2% of the transaction balance, are shadow-rated and have large pieces of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s weighted-average (WA) DBRS Refi DSCR improves to 1.06x from 1.03x and the concentration of loans with DBRS Refi DSCRs below 1.00x reduces to 42.4%.

As previously mentioned, two loans in the top 15, 85 Tenth Avenue and Potomac Mills, have trust participations that exhibit credit characteristics consistent with investment-grade shadow ratings. 85 Tenth Avenue has credit characteristics consistent with a BBB shadow rating while Potomac Mills has credit characteristics consistent with an A (low) shadow rating. In addition, 44 loans, representing 83.9% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes nine of the largest ten loans. Even when excluding the two shadow-rated loans, both of which have large pieces of subordinate mortgage debt held outside the trust, the deal continues to exhibit a favorable DBRS Term DSCR of 1.92x. Based on A-note balances only, the DBRS Term DSCR is even more robust at 2.02x.

The transaction has six properties, representing 22.6% of the pool, located in urban markets. Properties in urban markets benefit from consistent investor demand, even in times of stress. Urban markets represented in the deal include Seattle, New York, Atlanta, Culver City, West Hollywood and Newark. There are only six properties, representing 5.7% of the pool, located in tertiary markets and no properties located in rural markets. None of the loans secured by properties located in tertiary markets are within the top 20 loans of the pool. Properties located in tertiary and rural markets are modeled with significantly higher loss severities than those located in urban and suburban markets. Five loans, comprising 39.9% of the DBRS sample (28.8% of the pool), were considered to be of Above Average property quality based on physical attributes and/or a desirable location within their respective markets. All five of these loans are within the top 15 (The Summit Birmingham, KOMO Plaza, JW Marriott Desert Springs, Storbox Self Storage and Platform).

The transaction has a high concentration of loans that are secured by assets either fully or primarily used as retail at 34.9%. The retail sector has generally underperformed since the Great Recession because of a general decline in consumer spending power, store closures, chain bankruptcies and the rapidly growing popularity of ecommerce. According to the U.S. Census Bureau, e-commerce is projected to account for 10.0% of total retail sales in 2018, which is up from 7.8% in 2015. As the e-commerce share of sales is expected to continue to grow significantly in the coming years, the retail real estate sector may continue to be relatively weak. DBRS considers 55.0% of the pool’s retail loans to be secured by either anchored or regional mall properties, which are more desirable and have shown historically lower rates of default. The retail outlets are predominantly located in established suburban markets and the retail loans in the top ten exhibit high sales figures. The Summit Birmingham featured in-line sales of $603.00 per square foot (psf; excluding Apple at $513.00 psf) as of the T-12 period ending August 2016. East Market, an anchored retail center in Fairfax, Virginia, purported sales figures of $1,010 psf for Whole Foods Market, the anchor tenant, as of YE2015. Additionally, Potomac Mills is shadow-rated A (low) by DBRS.

The DBRS sample included 25 of the 62 loans in the pool. Site inspections were performed on 35 of the 94 properties in the portfolio (69.4% of the pool by allocated loan balance). The DBRS average sample NCF adjustment for the pool was -7.7% and ranged from -17.8% to +0.6%. The average DBRS sampled NCF haircut compares favorably with more recent transactions by DBRS where the average DBRS sampled haircut has averaged -8.3%.

The rating assigned to Class F differs from the higher rating implied by the Large Pool Multi-borrower Parameters. DBRS considers this difference to be a material deviation from the methodology and, in this case, the ratings reflect the dispersion of loan-level cash flows expected to occur post-issuance.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is North American CMBS Rating Methodology, which can be found on www.dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.