DBRS Confirms Ratings of Greystone Commercial Real Estate Notes 2017-FL1

DBRS Limited (DBRS) confirmed the ratings on the following classes of secured Floating-Rate Notes issued by Greystone Commercial Real Estate Notes 2017-FL1 (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at BBB (low) (sf)

All trends are Stable.

The transaction also features Senior and Junior Preferred Shares that are Non-Offered Notes and are retained by the Issuer.

The rating confirmations reflect the overall performance of the transaction, which has remained in line with DBRS’s expectations since issuance. At issuance, the collateral for the transaction consisted of 25 floating-rate mortgages secured by 27 transitional multifamily properties with a total balance of $366.6 million. The transaction has a Reinvestment Period that is scheduled to expire in September 2019 that allows the Issuer to replace loans repaid from the trust with newly originated loans. As part of this transaction feature, DBRS will evaluate new loans to assess any credit drift caused by potential loan concentrations and retains the ability to provide a Rating Agency Confirmation for proposed additions to the pool. Since issuance, eight loans have repaid out of the trust and ten loans have been added to the pool with redeployed funds between June 2017 and February 2018. As of the February 2018 remittance, there are 27 floating-rate loans outstanding in the pool secured by transitional assets in various stages of stabilization. One loan, representing 8.5% of the outstanding loan pool balance, has a pari passu companion participation held by a subsidiary of the trust asset seller and sponsor, Greystone Bridge Holdings, Inc.

Based on recently reported quarterly financials and servicer updates, most of the collateral properties remain in a period of transition, with sponsors in the process of executing their respective business plans. The loans are all secured by multifamily properties and only one loan, representing 2.5% of the pool, is secured by a student housing property. Additionally, student housing exposure for the trust is capped at 10.0% during the Reinvestment Period per the Eligibility Criteria. The current loans in the pool are considered high leverage on a per-unit basis, with the weighted-average current debt yield at 6.3% based on the DBRS As-Is Cash Flows and the current outstanding trust balance. However, the assets are generally well positioned to stabilize and any realized cash flow growth would improve the overall debt yields of the individual loans. As of the February 2018 remittance, there are no loans in special servicing and four loans on the servicer’s watchlist, representing 14.5% of the current pool balance. Two loans on the servicer’s watchlist are detailed below.

The Clark Place loan (Prospectus ID#2; 8.5% of the current pool balance) is secured by a 133-unit high-rise residential building and a four-storey parking structure located in Chicago. At issuance, it was noted that the property’s two-year renovation plan would include unit upgrades totalling $1.88 million ($25,000 per unit) as well as hallway and common area upgrades totalling $1.13 million. The loan was originally structured with a $2.5 million future funding commitment, held outside of the trust, to be allocated toward renovation costs. The renovation plan included 75 units that were to initially be upgraded, with the remaining units to be renovated over the following two years. As of November 2016, the property was achieving rental rates between $1,600 and $1,700 per unit, and at issuance, DBRS accepted the subject’s stabilized potential rent of $1,856 per unit, reflecting a $188 premium for the 75 units to be renovated. The loan was added to the watchlist as a result of the cash flow declines related to the ongoing renovations at the property, which began in 2017.

According to the servicer, the subject reported an occupancy rate of 74.0% as of December 2017, which has declined from the November 2016 occupancy rate of 96.3% due to the ongoing upgrades. As of September 2017, the borrower has spent $3.5 million of the capital expenditures budget and has completed renovations for 83 units, which reported average rental rates of approximately $1,950 per unit — above the DBRS stabilized potential rent of $1,856 per unit. According to Reis, the Lincoln Park submarket is reporting an average rental rate and vacancy rate of $1,414 per unit and 2.2%, respectively, with properties of similar vintage reporting an average rental rate and vacancy rate of $2,167 per unit and 2.1%, respectively. The borrower has been renovating units as tenants move out and is ahead of the two-year renovation schedule. Although the loan reported a Q3 2017 annualized debt service coverage ratio (DSCR) of 0.41 times (x), which was a decline from the DBRS As-Is Term DSCR of 0.53x, DBRS expects cash flows to improve as the renovations are completed, with all 133 units on line and available for rent. Despite the operational disruptions from the renovations, the subject benefits from a strong urban location and large units with a practical layout.

The 2025 Seward Avenue loan (Prospectus ID#21; 2.8% of the current pool balance) is secured by a 179‐unit multifamily complex located in the Bronx, New York. The borrower acquired the property in May 2017 and planned to construct and lease 25 new apartment units within three to six months after the purchase date. The 25 new apartments will be located on the ground floor, which previously did not contain any apartment units. The building is also occupied by tenants receiving housing vouchers under the Housing and Urban Development Section 8 program. As of May 2017, in-place rents were below the maximum reimbursement level, and as such, the borrower’s plan was to increase rents as leases roll to the maximum reimbursable rent as set by the New York City Housing Authority. The loan was added to the watchlist for low in-place cash flows, as the borrower is in the process of executing the business plan.

According to the servicer, the subject reported an occupancy rate of 78.0% as of September 2017, which has remained in line with the occupancy level reported in May 2017. As of September 2017, the borrower has funded the capital expenditures out of pocket instead of drawing on the repair escrow. In addition, a third-party inspection confirmed the completion of the 25 ground-floor units in Q4 2017 and the borrower plans to begin leasing the new units in the near term. According to Reis, the Bronx County submarket is reporting an average rental rate and vacancy rate of $1,319 per unit and 2.3%, respectively, with properties of similar vintage reporting an average rental rate and vacancy rate of $1,697 per unit and 1.7%, respectively. Although the loan reported a Q3 2017 annualized DSCR of 0.78x, which was a decline from the DBRS As-Is Term DSCR of 1.16x, cash flows will improve once the units added are leased and cash flowing. Despite the elevated vacancy at the subject, the property benefits from experienced sponsorship and relatively strong market dynamics within the Bronx County submarket.

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

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is CMBS North American Surveillance, 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

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 in connection with this rating action.

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