DBRS Finalizes Provisional Ratings on Citigroup Commercial Mortgage Trust 2017-P8

DBRS, Inc. (DBRS) finalized the provisional ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-P8 (the Certificates) issued by Citigroup Commercial Mortgage Trust 2017-P8 (CGCMT 2017-P8):

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

DBRS has also assigned new ratings to the following Certificates issued by CGCMT 2017-P8:

-- Class V-2A at AAA (sf)
-- Class V-2B at AAA (sf)
-- Class V-2C at A (high) (sf)
-- Class V-2D at BBB (sf)
-- Class V-3AC at A (high) (sf)
-- Class V-3D at BBB (sf)

Additionally, DBRS has withdrawn the rating on the following Certificate issued by CGCMT 2017-P8 as the class was not issued:

-- Class X-C at AA (low) (sf)

All trends are Stable.

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

The Class V-2 certificates may not be transferred unless certificates representing the exact same percentage interest in each and every other outstanding class of Class V-2 certificates are simultaneously transferred to that same person. Any holder of Class V-2 certificates must at all times hold the same percentage interest in each and every class thereof. The same holds true for all Class V-3 certificates.

The collateral consists of 53 fixed-rate loans secured by 167 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. Trust assets contributed from four loans, representing 17.7% of the pool, are shadow-rated investment-grade by DBRS. Proceeds for each shadow-rated loan are floored at their respective ratings within the pool. When 17.7% of the pool has no proceeds assigned below the rated floor, the resulting pool subordination is diluted or reduced below the rated floor. 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, only three loans, comprising 4.4% of the 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 28 loans, representing 51.7% of the pool, having refinance DSCRs below 1.00x and ten loans, representing 20.2% of the pool, having refinance DSCRs below 0.90x. These credit metrics are based on whole-loan balances. Two of the pool’s loans, General Motors Building and 245 Park Avenue, have a DBRS Refi DSCR below 0.90x for the respective whole loans; the trust contribution for both of these loans comprises 6.5% of the transaction balance and both are shadow-rated investment-grade by DBRS and have large pieces of subordinate mortgage debt outside the trust.

Four loans in the top 15 exhibit credit characteristics consistent with an investment-grade shadow rating: 225 & 233 Park Avenue South, General Motors Building, The Grove at Shrewsbury and Lakeside Shopping Center. These loans represent 17.7% of the transaction balance. Term default risk is low, as indicated by a strong weighted-average (WA) DBRS Term DSCR of 1.82x. In addition, 31 loans, representing 67.1% of the pool, have a DBRS Term DSCR in excess of 1.50x. Based on A-note balances only, the DBRS Term DSCR increases to 1.88x. Even when excluding the four loans shadow-rated investment-grade, the majority of which have large pieces of subordinate mortgage debt held outside the trust, the deal continues to exhibit a strong WA DBRS Term DSCR of 1.65x. Eight loans, comprising 37.3% of the DBRS sample (30.6% of the pool), have favorable property quality based on physical attributes and/or a desirable location within their respective markets. One loan (General Motors Building), representing 6.2% of the DBRS sample, was considered to be of Excellent property quality and two loans (9-19 9th Avenue and 3901 N First Street), totaling 8.7% of the DBRS sample, were considered to be Above Average property quality. Five additional loans (225 & 233 Park Avenue South, Bank of America Plaza, The Grove at Shrewsbury, Lakeside Shopping Center and 245 Park Avenue), representing 22.4% of the DBRS sample, received Average+ property quality. 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 has a high concentration of loans secured by office and retail properties, which represent 42.8% across 15 loans and 33.0% across 17 loans, respectively, which on a combined basis, represent 75.8% of the pool across 32 loans. 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 to experience store closures for underperforming properties. Office concentration can be a challenge in the face of high unemployment and shifts in space demand generators. The vast majority, or 41.1% of the office concentration, is located in urban or super dense urban locations with strong employment, including three in the top 15. Additionally, DBRS considers 83.5% of the pool’s retail loans to be secured by either anchored or regional mall properties with strong sales and/or strong historical occupancy trends, which are more desirable and have shown lower rates of default historically. These retail outlets are predominantly located in established urban or suburban markets. Two of the retail properties, The Grove at Shrewsbury and Lakeside Shopping Center, exhibit credit characteristics consistent with investment-grade shadow ratings and represent approximately 21.4% of the pool’s retail concentration. Nineteen loans, representing 43.1% of the pool, including ten of the largest 15 loans, are structured with interest-only (IO) payments for the full term. An additional 17 loans, representing 35.7% of the pool, have partial IO periods ranging from 12 months to 60 months. The percentage of loans structured with full-term and partial IO payments relative to the total pool is elevated at 78.8%. Seven of the full- or partial-term IO loans, representing 30.4% of the IO concentration in the transaction, have excellent locations in super dense urban markets that benefit from steep investor demand. 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 probability of default on the lower of the DBRS Term or Refi DSCR; therefore, loans that lack amortization will be treated more punitively.

The DBRS sample included 30 of the 53 loans in the pool. Site inspections were performed on 50 of the 167 properties in the portfolio (70.7% of the pool by allocated loan balance). The DBRS sample had an average NCF variance of -11.6% and ranged from -26.6% (General Motors Building) to 10.7% (Bradley Business Center).

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.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), 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 require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is the North American Multi-borrower CMBS Methodology, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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