DBRS Assigns Provisional Ratings to Morgan Stanley Capital I Trust 2017-H1

DBRS, Inc. (DBRS) has today assigned provisional ratings to the followings classes of Commercial Mortgage Pass-Through Certificates, Series 2017-H1 (the Certificates), to be issued by Morgan Stanley Capital I Trust 2017-H1:

-- 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 A (sf)
-- Class D at A (low) (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BBB (low) (sf)
-- Class G-RR at BB (low) (sf)
-- Class H-RR at B (low) (sf)

All trends are Stable.

Classes X-D, D, E-RR, F-RR, G-RR and H-RR will be privately placed. The Class X-A, X-B and X-D balances are notional. Classes E-RR, F-RR, G-RR, H-RR and J-RR (collectively, the HRR Certificates (Eligible Horizontal Residual Interest)) will be retained by the retaining sponsor or its majority-owned affiliate in accordance with the credit risk retention rules applicable to this securitization transaction.

The collateral consists of 58 fixed-rate loans secured by 89 commercial and multifamily 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 into a portfolio, 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, one loan, representing 0.8% of the aggregate pool 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 23 loans, representing 48.9% of the pool, having refinance DSCRs below 1.00x and 14 loans, representing 35.1% of the pool with refinance DSCRs below 0.90x.

Overall, the pool exhibits a relatively strong DBRS weighted-average (WA) Term DSCR of 1.59x based on the whole-loan balance, which indicates moderate term default risk, and there are no shadow-rated loans skewing such metrics. Furthermore, only three loans, representing 11.1% of the pool, are secured by properties that either fully or primarily leased to a single tenant. Loans secured by properties occupied by single tenants have been found to suffer from higher loss severities in the event of default. As such, DBRS modeled single-tenant properties with a higher probability of default (POD) and cash flow volatility compared with multi-tenant properties. The pool is relatively diverse based on loan size with a concentration profile equivalent to that of a pool of 33 equal-sized loans. Diversity is further enhanced by seven loans, representing 19.1% of the pool, that are secured by multiple properties (39 in total). Increased pool diversity insulates the higher-rated classes from event risk. Nine loans, representing 30.0% 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, Washington; New Orleans, Louisiana; Austin, Texas; and Denver, Colorado.

The transaction’s WA DBRS Refinance (Refi) DSCR is 1.01x, indicating a higher refinance risk on an overall pool level. Furthermore, 14 loans, representing 39.6% of the pool, including six of the largest ten loans, are structured with full-term interest-only (IO) payments. An additional 18 loans, comprising 28.1% of the pool, have partial IO periods ranging from 17 months to 60 months. The DBRS Term DSCR is calculated by using the amortizing debt service obligation and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines the POD based on the lower of Term or Refi DSCR; therefore, loans that lack amortization will be treated more punitively. Five of the full-term IO loans, representing 40.0% of the full IO concentration in the transaction, are located in urban markets. Of these, three loans, totaling 20.4% of the concentration, have excellent locations in immensely infill Super Dense Urban markets that benefit from steep investor demand. The deal appears to be concentrated by property type with 14 loans, representing 40.0% of the pool, secured by office properties and 12 loans, representing 18.6% of the pool, secured by 13 hotel properties. Of the office property concentration, 42.6% of the loans are located in urban markets and no loans are located in tertiary/rural markets. DBRS cash flow volatility for hotels, which ultimately determines a loan’s POD, assumes between a 22.4% and 28.4% cash flow decline for a BBB stress and a 60.2% and 76.4% cash flow decline for a AAA stress. To further mitigate the more volatile cash flow of hotels, the loans in the pool secured by hotel properties have a WA DBRS Debt Yield and DBRS Exit Debt Yield of 10.8% and 12.4%, respectively, which compare quite favorably with the comparable figures of 8.9% and 9.9%, respectively, for the non-hotel properties in the pool. Additionally, 50.9% of the hotel concentration is located in urban markets.

The DBRS sample included 31 of the 57 loans in the pool. Site inspections were performed on 50 of the 89 properties in the portfolio (72.2% of the pool by allocated loan balance). The DBRS sample had an average NCF variance of -8.7%, ranging from -21.4% to -0.4%. DBRS identified ten loans, representing 23.3% of the pool, with unfavorable sponsor strength, including two of the top ten loans. DBRS increased the POD for the loans with identified sponsorship concerns.

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 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 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.