DBRS Finalizes Provisional Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33

DBRS, Inc. (DBRS) has today finalized the provisional ratings on the followings classes of Commercial Mortgage Pass-Through Certificates, Series 2017-C33 (the Certificates) issued by Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33:

-- 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 A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

Classes X-D, D, E, F and G have been privately placed. The Classes X-A, X-B and X-D balances are notional.

The collateral consists of 44 fixed-rate loans secured by 70 commercial properties. Two of the loans are cross-collateralized and cross-defaulted into a separate crossed group. The DBRS analysis of this transaction incorporates these loans as a portfolio, resulting in a modified loan count of 43. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the 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, there were no loans with 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 six loans, representing 21.0% of the pool, having refinance (Refi) DSCRs below 1.00x.

The pool consists of relatively low-leverage financing, with a DBRS Debt Yield and DBRS Exit Debt Yield of 9.9% and 11.3%, respectively. Such figures compare favorably with recently issued conduit transactions rated by DBRS. In addition, 21 loans, representing 50.9% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes six of the largest ten loans. The pool’s general refinance risk is also relatively low as indicated by the robust DBRS Refi DSCR of 1.15x. Only six loans, representing 21.0% of the pool, have DBRS Refi DSCRs below 1.00x, which is well below recent conduit pools rated by DBRS. There are no shadow-rated loans skewing such metrics.

Six loans, comprising 17.5% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes four of the largest 15 loans: Pentagon Center, 141 Fifth Avenue, Ralph’s Food Warehouse Portfolio and 935 First Avenue. Of note, Ralph’s Food Warehouse Portfolio, which totals 2.4% of the pool, is located in tertiary areas across Puerto Rico, which filed for a form of bankruptcy protection on May 3, 2017, and is 78.1% owner occupied. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. However, approximately 68.1% of the single-tenant concentration stems from properties occupied by investment-grade tenants with significant capital invested into their space. Pentagon Center is fully occupied by the Department of Defense, which recently relocated 1,800 employees to the subject. It is a low-leveraged loan as indicated by the DBRS Debt Yield of 10.0% with a moderate loan per square foot of $230, which is well below recent sales prices in its market. The second-largest loan contributing to the pool’s single-tenant concentration is 141 Fifth Avenue, which has an excellent location in Manhattan’s Flatiron District. Its sole occupant is HSBC, which currently pays a below-market rental rate. Both loans are well structured with cash flow sweeps tied to tenant renewals.

DBRS considers the macro-economic risk associated with the Ralph’s Food Warehouse Portfolio loan to be relatively moderate given there is no currency risk in Puerto Rico and the loan is scheduled to amortize on a 20-year schedule, which will reduce the loan’s exposure by 32.9% upon maturity in 2017. Moreover, the loan has prudent leverage metrics with a DBRS Refi DSCR and DBRS Exit Debt Yield of 1.69x and 16.6%, respectively. Six loans, representing 26.6% of the pool, including four of the largest ten loans, are structured with interest-only (IO) payments for the full term. An additional 17 loans, representing 45.4% of the pool, have partial IO periods remaining ranging from 12 months to 60 months. Four of the full-term IO loans, representing 70.1% of the full IO concentration in the transaction, are located in urban markets. Of these, three loans, totaling 38.0% concentration, have excellent locations in immensely infill Super Dense Urban markets that benefit from steep investor demand.

The DBRS sample included 27 of the 42 loans in the pool. Site inspections were performed on 49 of the 70 properties in the portfolio (81.7% of the pool by allocated loan balance). The DBRS sample had an average NCF variance of -8.4% and ranged from -19.6% to +2.1% (Chicago Crossed Loans).

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.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

The principal methodology is North American CMBS Multi-Borrower Rating Methodology, which can be found on 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 a 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.