DBRS Finalizes Provisional Ratings on CD 2017-CD4 Mortgage Trust

DBRS, Inc. (DBRS) has today finalized its provisional ratings and, in the case of certain classes, assigned new ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CD4 (the Certificates) issued by the CD 2017-CD4 Mortgage Trust:

-- 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-M at AAA (sf)
-- Class V-A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class V-BC at A (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class V-D at BBB (sf)
-- Class X-E at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class X-F at BB (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

Classes D, E, F, X-B, X-D, X-E and X-F have been privately placed.

The Class X-A, X-B, X-D, X-E and X-F balances are notional.

The Class VRR Interest and Classes V-A, V-BC, V-D and V-E (not rated and therefore not listed above) represent beneficial interests in the VRR Specific Grantor Trust Assets (as such terms are defined in the deal documents), which collectively represent approximately 5.0% of the aggregate initial certificate balance of all of the ABS interests issued by the issuing entity. These classes are non-offered certificates that will be retained by certain retaining parties in accordance with the credit risk retention rules applicable to this securitization transaction.

The Class V-A, V-BC, V-D and V-E Certificates collectively represent a beneficial ownership interest in the Class V-A/BC/D/E Percentage of the VRR Specific Grantor Trust Assets. The Class V-A/BC/D/E Certificates will not have Pass-Through Rates, but will instead collectively entitle Holders to interest on any Distribution Date in an aggregate amount equal to the sum of (a) the product of (i) the Class V-A/BC/D/E Percentage and (ii) the VRR Interest Distribution Amount for such Distribution Date and (b) the product of (i) the Class V-A/BC/D/E Percentage and (ii) the VRR Interest Percentage of the Excess Interest Distribution Amount for such Distribution Date (as such terms are defined in the deal documents).

On the closing date, pursuant to the VRR Interest Purchase Agreement, German American Capital Corporation (GACC) is purchasing $45,022,523 of the VRR Interest for cash from the Depositor and Citi Real Estate Funding Inc. (CREFI) is in turn purchasing $14,617,250 of the VRR Interest for cash from GACC, with GACC to retain the remaining $30,405,273 of the VRR Interest through an affiliate, Deutsche Bank AG New York Branch (DBNY). It is also expected that CREFI will retain its portion of the VRR Interest through Citigroup Global Markets Realty Corp. (CGMRC), one of its affiliates.

The collateral consists of 47 fixed-rate loans secured by 53 commercial and multifamily properties. 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. Trust assets contributed from two loans, representing 16.8% of the pool, are shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective ratings within the pool. When the combined 16.8% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, three loans, representing 2.3% of the total pool, 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 21 loans, representing 47.2% of the pool, having refinance DSCRs below 1.00x. These credit metrics are based on whole loan balances. One of the pool’s loans with a DBRS Refi DSCR below 0.90x, Hilton Hawaiian Village, representing 6.3% of the transaction balance, has large 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 1.07x.

Term default risk is moderate as indicated by the relatively strong DBRS Term DSCR of 1.61x. In addition, 18 loans, representing 43.1% of the pool, have a DBRS Term DSCR in excess of 1.50x. Two loans, 95 Morton Street and Hilton Hawaiian Village, representing a combined 16.8% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings of BBB (low) and BBB (high), respectively, and even when excluding these loans, the deal exhibits a favorable DBRS Term DSCR of 1.58x. Nine loans, representing 41.9% of the pool, are located in either urban or super dense urban markets, both of which benefit from consistent investor demand and increased liquidity even in times of stress. Super dense urban markets represented in this deal include New York, New York, and Santa Monica, California, while urban markets consists of Sunnyvale, California; Honolulu, Hawaii; Long Island City, New York; Cleveland, Ohio; and Brooklyn, New York. Additionally, only eight loans, representing 8.7% of the pool, are located in tertiary/rural markets. Four of the largest 15 loans, representing 27.9% of the DBRS sample, received an Excellent or Above Average property quality grade, and no loans received Below Average or Poor property quality grades. Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance.

The pool is extremely concentrated based on loan size, with a concentration profile equivalent to that of a pool of 23 equal-sized loans. The largest five and ten loans total 38.9% and 55.7% of the pool, respectively. The pool is also highly concentrated by property type, as the office concentration is 45.0%. Ten loans, representing 28.4% of the pool, including four of the largest 15 loans, are structured with full-term IO payments. An additional 18 loans, comprising 44.5% of the pool, have partial IO periods ranging from 19 months to 84 months. As a result, the transaction’s scheduled amortization by maturity is only 9.9%, which is generally below other recent conduit securitizations. Ten loans, representing 19.1% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes one of the largest 15 loans, Moffett Place Google. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. As such, DBRS applied a higher probability of default and cash flow volatility to single-tenant properties compared with multi-tenant properties.

The DBRS sample included 20 of the 47 loans in the pool. Site inspections were performed on 20 of the 53 properties in the portfolio (65.6% of the pool by allocated loan balance). The DBRS sample had an average NCF variance of -12.1% from the Issuer’s NCF and ranged from -23.7% (Troy Office Portfolio) to +0.2% (Champion Forest Self Storage).

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 methodologies are North American CMBS Multi-borrower Rating Methodology, Rating North American CMBS Interest-Only Certificates and DBRS Commercial Real Estate Property Analysis Criteria, 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 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.