DBRS Confirms All Classes of BXP Trust 2017-CC

DBRS Limited (DBRS) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-CC issued by BXP Trust 2017-CC as follows:

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

All trends are Stable.

The rating conformations reflect the overall stable performance of the transaction since issuance. This transaction consists of a ten-year interest-only (IO) fixed-rate loan of $350.0 million loan secured by Colorado Center in Santa Monica, California. The trust loan is part of a split-loan structure with an aggregate outstanding whole-loan balance of $550.0 million. The collateral is an office park consisting of six Class A buildings totalling 1.2 million square feet and a three-level underground parking garage situated on a 15.0-acre plot of land. The property is located approximately 1.5 miles northeast of downtown Santa Monica, in the heart of the city’s Media and Entertainment District. According to the Q1 2018 financials, the loan reported an annualized debt service coverage ratio (DSCR) of 2.32 times (x) compared with the DBRS Term DSCR of 2.24x derived at issuance. The loan did not report YE2017 financials.

The office park was originally built in 1984 and underwent renovations in 2004. The sponsor, Boston Properties, Inc., will be injecting substantial improvements to revamp the property’s retail and food-court portions to improve its overall marketability within the submarket. According to the servicer’s May 2018 site inspection, an $18.9 million renovation project was in process. The project was said to include work to modernize elevators, make Americans with Disabilities Act-required upgrades and complete systems upgrades. There is an additional project planned for the next year at an estimated cost of $4.8 million with funds slated to complete the remaining renovations.

As of the March 2018 rent roll, the subject was 83.9% occupied, a decline from the physical occupancy rate of 86.2% and leased rate of 91.5% at issuance. At issuance, DBRS noted that existing tenant, Edmunds.com Inc. (which houses its headquarters at the subject), was expected to expand into the third floor of the 2401 Colorado building for a ten-year term beginning in August 2018, but the March 2018 rent roll shows that the space remains vacant and available for lease. The rent roll shows Edmunds.com Inc. in place for 11.3% of the net rentable area (NRA) on a lease that runs through January 2028. DBRS has requested clarification from the servicer on the status of that space and the tenant’s plans for expansion.

In addition to Edmunds.com Inc., the subject also serves as headquarters for Hulu, Rubin Postaer and Associates (RPA) and Kite Pharma, Inc. (Kite Pharma). The three-largest tenants are Hulu (20.4% of NRA with lease expiry in November 2021), RPA (15.9% of NRA with lease expiry in December 2025) and Kite Pharma (13.5% of NRA with lease expiry in July 2032). HBO (10.9% of NRA) has informed the sponsor of its intent to vacate the subject upon lease expiration in June 2019 with the servicer reporting ongoing negotiations to sign the tenant for a nine-month extension. The servicer also noted that the borrower is conducting lease negotiations for two units, representing 6.3% of NRA, with these leases expected to be finalized by May 2018. DBRS has requested an update on the status of these negotiations and, as of the date of this press release, a response is pending.

Although the property’s leased rate has fallen since issuance, with potential for further decline in the near term once HBO vacates, DBRS believes the property is well positioned in the market, given the sponsor’s recent capital investment and plans for additional upgrades to improve the property’s competitive stance. The market dynamics remain stable from issuance with CoStar reporting an office vacancy rate of 15.7% within a 0.25-mile radius of the property as of August 2018.

Class X-A are IO certificates that reference a single-rated tranche or multiple-rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS. As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes loan level-data for the entire CMBS universe as well as deal and loan-level commentary for all DBRS-rated transactions.

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.

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.

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