DBRS Assigns Provisional Ratings to BBCMS Mortgage Trust 2017-C1

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-C1 (the Certificates) issued by BBCMS Mortgage Trust 2017-C1:

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

All trends are Stable.

Classes X-D, X-E, X-F, X-G, X-H, D, E, F and G are being privately offered.

The Class X-A, X-B, X-D, X-E, X-F and X-G 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 requested comment on its proposed methodology “Rating North American CMBS Interest-Only Certificates.” If this methodology is adopted without changes, DBRS believes that potential rating actions for IO certificates could be either downgrades or confirmations. Please refer to the January 17, 2017, DBRS press release for further details on the proposed methodology.

The collateral consists of 58 fixed-rate loans secured by 75 commercial and multifamily properties. Two of the loans are cross-collateralized and cross-defaulted into one crossed group. The DBRS analysis of this transaction incorporates this crossed group, resulting in a modified loan count of 57, and the loan number references within this report reflect this total. The transaction is a sequential-pay pass-through structure. 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, three loans, representing 10.4% of the aggregate loan balance, 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. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 24 loans, representing 52.3% of the pool, with refinance DSCRs below 1.00x and 11 loans, representing 32.0% of the pool, with refinance DSCRs below 0.90x. These credit metrics are based on whole-loan balances. One of the pool’s loans with a DBRS Refinance (Refi) DSCR below 0.90x, 1166 Avenue of the Americas, representing 6.6% of the transaction balance, has pieces of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s weighted-average DBRS Refi DSCR improves marginally to 1.05x.

Two of the largest 11 loans, Merrill Lynch Drive and State Farm Data Center, have trust participations that exhibit credit characteristics consistent with investment-grade shadow ratings. When combined, these loans represent 7.8% of the pool. Merrill Lynch Drive has credit characteristics consistent with an “A” shadow rating, while State Farm Data Center exhibits credit characteristics consistent with a AA shadow rating. Furthermore, term default risk is low, as indicated by a relatively strong DBRS Term DSCR of 1.57x, which is based on the whole-loan balances. In addition, 26 loans, representing 49.6% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes eight of the largest 12 loans. Ten loans, representing 29.8% of the pool, are located in urban markets with increased liquidity that benefit from consistent investor demand, even in times of stress. Urban markets represented in the deal include New York City; Seattle; Los Angeles; Charlotte, North Carolina; New Haven, Connecticut; Inglewood, California; and Rancho Cordova, California. Lastly, five loans, representing 21.2% of the pool, are secured by properties exhibiting Above Average quality, while only three loans, representing 5.6% of the pool, were deemed Below Average. The remaining loans were considered to be of Average property quality.

The transaction has a high concentration of loans (43.4% of the pool) that are backed by office properties. Of the office property concentration, 13.4% is secured by Merrill Lynch Drive, which DBRS considers to have credit characteristics consistent with an “A” shadow rating. Furthermore, the transaction has a moderate concentration of loans that are secured by assets either fully or primarily used as retail at 23.3%. 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 e-commerce. According to the U.S. Census Bureau, e-commerce sales represented 7.0% of total retail sales in 2015 compared with 3.9% in 2009. 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 66.6% of the retail concentration to be secured by either anchored or regional mall properties, which are more desirable and have historically shown lower rates of default. Furthermore, roughly 25.0% of the retail concentration is backed by The Summit Birmingham, which has in-line sales in excess of $600.00 psf and is identified by DBRS as having Above Average property quality

Thirteen loans, representing 47.3% of the pool, including eight of the largest 11 loans, are structured with IO payments for the full term. An additional 18 loans, representing 22.6% of the pool, have partial IO periods remaining that range from 24 months to 60 months. This concentration includes both shadow-rated loans, which total 7.8% of the pool. The DBRS Term DSCR is calculated by using the amortizing debt service obligation, and the DBRS Refi DSCR is calculated by considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines probability of default based on the lower of Term or Refi DSCRs; therefore, loans that lack amortization will be treated more punitively. The transaction’s scheduled amortization by maturity is 7.4%, which is generally worse than recent conduit securitizations; however, the two shadow-rated loans are both structured with an anticipated repayment date (ARD). DBRS assumes the ARD maturity balance is utilized, thereby increasing the pool’s amortization to 10.1%, which is generally in line with recent conduit securitizations.

The DBRS sample included 29 loans of the 57 loans in the pool. Site inspections were performed on 33 of the 75 properties in the portfolio (75.3% of the pool by allocated loan balance). The DBRS sample had an average NCF variance of -10.4% from the Issuer’s NCF and ranged from -32.2% to +1.5%. 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 rating reflects 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 principal methodology is the 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 when 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.