DBRS Finalizes Provisional Ratings on CD 2017-CD6 Mortgage Trust

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CD6 to be issued by CD 2017-CD6 Mortgage Trust:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-D at A (high) (sf)
-- Class D at A (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BB (high) (sf)
-- Class G-RR at BB (low (sf)

All trends are Stable.

Classes X-B, X-D, D, E-RR, F-RR and G-RR have been privately placed. The Class X-A, X-B, and X-D balances are notional. Classes X-A, X-B and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

The collateral consists of 58 fixed-rate loans secured by 125 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 three loans, representing 9.0% 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 9.0% 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 4.5% 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 23 loans, representing 44.2% of the pool, having refinance DSCRs below 1.00x, and 14 loans, representing 30.4% of the pool, having refinance DSCRs below 0.90x. Burbank Office Portfolio and Colorado Center, which represent 6.6% of the transaction balance and are two of the pool’s loans with a DBRS Refinance (Refi) DSCR below 0.90x, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s weighted-average (WA) DBRS Refi DSCR improves to 1.11x, and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 37.5% and 23.8%, respectively.

Eleven of the largest 26 loans, representing 36.4% of the DBRS sample, have favorable property quality. One loan (Moffett Place Building 4), representing 3.1% of the sample, was considered to be of Excellent property quality; four loans (Burbank Office Portfolio, Homewood Suites Savannah, 337 Lafayette Street and Harrison Luxury Apartments), representing 15.8% of the sample, in aggregate, received an Above Average property quality; and six additional loans, representing 17.5% of the sample, in aggregate, received Average (+) property quality. Additionally, 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 more stable performance. Furthermore, three loans, Burbank Office Portfolio, Moffett Place Building 4 and Colorado Center, representing a combined 9.0% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. Burbank Office Portfolio exhibits credit characteristics consistent with a BBB shadow rating, Moffett Place Building 4 exhibits credit characteristics consistent with an A (low) shadow rating and Colorado Center exhibits credit characteristics consistent with a AAA shadow rating. Lastly, term default risk is moderate, as indicated by the relatively strong DBRS Term DSCR of 1.76x. In addition, 29 loans, representing 65.8% of the pool, have a DBRS Term DSCR in excess of 1.50x. Even when excluding the three investment-grade shadow-rated loans, the deal exhibits a favorable DBRS Term DSCR of 1.73x.

While the transaction office concentration is 41.0%, 9.0% of the transaction balance and 21.9% of the office concentration are shadow-rated investment grade by DBRS. Fifteen loans, representing 34.2% of the pool, including six of the largest 15 loans, are structured with full-term IO payments. An additional 20 loans comprising 29.5% of the pool have partial IO periods ranging from seven months to 57 months. As a result, the transaction’s scheduled amortization by maturity is only 10.8%, which is generally below other recent conduit securitizations.

The DBRS Term DSCR is calculated 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 probability of default based on the lower of term or refinance DSCRs; therefore, loans that lack amortization are treated more punitively. Five of the full-term IO loans, representing 32.1% of the full-IO concentration in the transaction, are located in urban markets. Additionally, two of these loans (Burbank Office Portfolio and Colorado Center) are shadow-rated investment grade by DBRS. The transaction also has 11 loans, representing 15.8% of the transaction balance, secured by properties that are either fully or primarily leased to a single tenant. This includes two of the largest 15 loans, Costco JFK and Moffett Place B4. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. As a result, DBRS applied a penalty for single-tenant properties that resulted in higher loan-level credit enhancement.

Google LLC (Google) has fully executed leases for six office towers in the larger Moffett Place office campus, including the subject building, and views the entire campus as mission critical given that the tenant has outgrown its global headquarters in Mountain View, California. Google is also projected to contribute anywhere from $250 per square foot (psf) to $300 psf toward tenant improvements at each of the six office buildings, including the subject.

Furthermore, the majority of the loans, including Moffett Place Building 4, have been structured with cash flow sweeps prior to tenant expiry. Costco Wholesale Corporation is an investment-grade tenant that leases the land through September 30, 2032, and is currently generating sales in excess of $1,000 psf.

There are eight loans, totaling 18.1% of the pool, secured by hotels, which are vulnerable to having high NCF volatility because of their relatively short-term leases compared with other commercial properties, which can cause the NCF to quickly deteriorate in a declining market. Four of the largest 15 loans are secured by either hospitality or self-storage properties. Such loans exhibit a weighted-average (WA) DBRS Debt Yield and DBRS Exit Debt Yield of 11.0% and 12.9%, respectively, which compare favorably with the overall deal. Additionally, the vast majority, or 93.4%, of such loans are located in established urban or suburban markets that benefit from increased liquidity and more stable performance. The transaction’s WA DBRS Refi DSCR is 1.07x, indicating higher refinance risk on an overall pool level. In addition, 23 loans, representing 44.2% of the pool, have DBRS Refi DSCRs below 1.00x, including four of the top ten loans and five of the top 15 loans. Fourteen of these loans, comprising 30.4% of the pool, have DBRS Refi DSCRs less than 0.90x, including three of the top ten loans and four of the top 15 loans. These credit metrics are based on whole-loan balances. Two of the pool’s loans with a DBRS Refi DSCR below 0.90x, Burbank Office Portfolio and Colorado Center, which represent 6.6% of the transaction balance and are two of the pool’s loans with a DBRS Refi DSCR below 0.90x, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s WA DBRS Refi DSCR improves to 1.11x, and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 37.5% and 23.8%, respectively. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.82%, which implies an interest rate of 9.19%, amortizing on a 30-year schedule. This represents a significant stress of 4.89% over the WA contractual interest rate of the loans in the pool.

The DBRS sample included 30 of the 58 loans in the pool. Site inspections were performed on 57 of the 125 properties in the portfolio (61.9% of the pool by allocated loan balance). DBRS conducted meetings with the on-site property managers, leasing agents or representatives of the borrowing entities for 63.1% of the pool. A cash flow review as well as a cash flow stability and structural review were completed on 30 of the 58 loans, representing 77.3% of the pool by loan balance. The DBRS sample had an average NCF variance of -11.0% from the issuer’s NCF and ranged between -31.2% (Capitol Center) and +3.1% (FedEx Ground – Durham).

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint 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 North American CMBS Multi-borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.