DBRS Assigns Provisional Ratings to Morgan Stanley Capital I Trust 2017-HR2

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-HR2 to be issued by Morgan Stanley Capital I Trust 2017-HR2:

-- 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 X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (high) (sf)
-- Class G-RR at BB (low) (sf)
-- Class H-RR at B (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.

The collateral consists of 42 fixed-rate loans secured by 82 commercial and multifamily properties. 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. The trust asset contributed from one loan, representing 9.0% of the pool, is shadow-rated investment grade by DBRS. Proceeds for shadow-rated loans are floored at their respective ratings within the pool. When 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. The second-largest loan, The Woods, is shadow-rated AA. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow and their respective actual constants, three loans, representing 3.9% 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 28 loans, representing 64.6% of the pool, having refinance DSCRs below 1.00x, and 20 loans, representing 49.9% of the pool, with refinance DSCRs below 0.90x.

There are nine loans, representing 26.1% of the pool, that are located in urban markets, which benefit from consistent investor demand and increased liquidity even in times of stress. Of these, two loans, totaling 3.7% of the transaction balance, are considered to be located in Super-Dense Urban markets that DBRS defines as gateway locations with extremely high liquidity and low cap rates. Urban markets represented in the deal include New York; Washington, D.C.; Sacramento, California; Las Vegas; and Detroit. Additionally, only nine loans, totaling 9.7% of the transaction balance, are considered to be located in tertiary/rural markets.

Four loans, totaling 21.3% of the pool, are backed by Strong sponsors, all of which are in the top 15, including Extra Space Storage Inc., Totowa Commons, Bakers Centre and Hampton Inn & Suites Ballpark. Two loans, representing 4.6% of the pool, have sponsorship and/or loan collateral associated with prior voluntary bankruptcy, discounted payoff, loan default, civil judgment, foreclosure, limited net worth/liquidity relative to the loan obligation and/or inadequate commercial real estate experience.

Term default risk is moderate, as indicated by the strong weighted-average DBRS Term DSCR of 1.96x. In addition, 23 loans, representing 72.2% of the pool, have a DBRS Term DSCR in excess of 1.50x, which includes 12 of the top 15 loans. The DBRS Refinance (Refi) DSCR is 0.99x, indicating a higher refinance risk on an overall pool level. In addition, 28 loans, representing 64.6% of the pool, have DBRS Refi DSCRs below 1.00x, including eight of the top ten loans and 11 of the top 15. Twenty loans, representing 49.9% of the pool, have DBRS Refi DSCRs below 0.90x, including six of the top ten.

Nineteen loans, representing 67.2% of the pool, including eight of the largest ten loans, are structured with full-term interest-only (IO) payments. An additional 12 loans, comprising 18.7% of the pool, including two in the top ten, have partial IO periods remaining that range from 22 months to 60 months. Five of the full-term IO loans, representing 28.3% of the full IO concentration in the transaction, are located in urban markets. Of these, three loans, totaling 5.5% of the concentration, have excellent locations in immensely infill Super-Dense Urban markets that benefit from steep investor demand. Additionally, no loans of the full IO concentration are located in a tertiary/rural market.

The deal appears concentrated by property type, with 15 loans, representing 37.9% of the pool, secured by retail properties. Of the retail property concentration, 79.8% is considered Anchored Retail, with the remaining 20.2% considered Unanchored Retail. Anchored Retail properties have shown lower rates of default historically compared with Unanchored Retail. Excluding two loans secured by mixed-used properties, 173 Court Street and 275 North Washington, the deal retail concentration drops slightly to 36.1%.

Classes X-A, X-B and X-D are 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.

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 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 Multi-borrower CMBS 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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

Please see the related <a href=" https://www.dbrs.com/research/320224/morgan-stanley-capital-i-trust-2017-hr2-rating-sensitivity-analysis" target="_blank">Rating Sensitivity Analysis</a> for additional information regarding the sensitivity of assumptions used in the rating process.

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.