DBRS Finalizes Provisional Ratings on BANK 2017-BNK5

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the followings classes of Commercial Mortgage Pass Through Certificates, Series 2017-BNK5 (the Certificates), to be issued by BANK 2017-BNK5.

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

All trends are Stable.

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

The collateral consists of 87 fixed-rate loans secured by 211 commercial and multifamily properties, comprising a total transaction balance of $1,231,288,365. The transaction has 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, 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. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 26 loans, representing 53.3% of the pool, having refinance DSCRs below 1.00x, and 12 loans, representing 32.6% of the pool, having refinance DSCRs below 0.90x. These credit metrics are based on whole loan balances. Based on A-note balances only, the deal’s weighted-average (WA) DBRS Refi DSCR improves to 1.25x.

Term default risk is low as indicated by the relatively strong WA DBRS Term DSCR of 1.98x. In addition, 64 loans, representing 66.9% of the pool, have a WA DBRS Term DSCR in excess of 1.50x. Fours loan in the top 15 (Del Amo Fashion Center, Olympic Tower, Gateway Net Lease Portfolio and Stor-It Southern California Portfolio) have credit characteristics consistent with shadow ratings of A (low), A (low), BBB (high) and AA (high), respectively. These loans represent 18.2% of the total pool cut-off balance. Twenty-eight loans, representing 7.3% of the pool, are secured by cooperative properties and are very low-leverage, with minimal term and refinance default risk. Even when excluding the four loans with shadow-rating characteristics and 28 co-op loans, the deal exhibits a favorable WA DBRS Term DSCR of 1.72x.

The WA DBRS Refi DSCR, excluding the 28 National Cooperative Bank, N.A. co-op loans and one fully amortizing loan, Henson Studio, is 1.04x, indicating a higher refinance risk on an overall pool level. The percentage of loans structured with full-term and partial interest-only payments relative to the total pool is at 70.9% for the subject transaction. DBRS determines the probability of default based on the lower of Term or Refi DSCR; therefore, loans that lack amortization will be treated more punitively.

The pool has a high concentration of retail properties, as 38.7% of the properties in the pool are secured entirely by retail assets. The retail sector has generally underperformed since the Great Recession because of declining consumer spending power, store closures, chain bankruptcies and the rapidly growing popularity of e-commerce. 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 experience store closures for underperforming properties. DBRS considers 69.6% of the pool’s retail loans to be secured by either anchored or regional mall properties, which are more desirable and have shown lower rates of default historically. Additionally, these retail outlets are predominantly located in established suburban markets. Two of the retail properties, Del Amo Fashion Center and Olympic Tower, exhibit credit characteristics consistent with shadow ratings and represent approximately 30.6% of the pool’s retail concentration.

Seven loans, representing 26.0% of the pool balance, were considered to have strong sponsorship. Six of these loans are included in the top 15: Del Amo Fashion Center, Market Street - The Woodlands, Olympic Tower, Gateway Net Lease Portfolio, Charlotte Southpark Marriott and 36 East 14th Street.

A cash flow review as well as a cash flow stability and structural review were completed on 29 of the 87 loans, representing 71.6% of the pool by loan balance. The DBRS sample had an average NCF variance of -8.5% and ranged from -24.5% to 2.7%. The DBRS site inspection sample included 26 of the 87 loans in the pool. Site inspections were performed on 61 of the 211 properties in the portfolio, representing 61.7% of the pool by allocated loan balance. Twelve loans, comprising 53.4% of the DBRS sample (38.3% of the pool), were considered to be of Above Average or Average (+) property quality based on physical attributes and/or a desirable location within their respective markets. Five of these loans are within the top ten (Del Amo Fashion Center, Market Street - The Woodlands, Olympic Tower, Sprouts Farmers Market and 200 Center Anaheim). Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance. Only one loan, comprising 0.5% of the DBRS sample and 0.4% of the pool, was considered to be of Average (-) property quality.

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 that 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.

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