DBRS Morningstar Confirms Ratings on BXP Trust 2017-CC, Removes Under Review – Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CC issued by BXP Trust 2017-CC (the Issuer):

-- 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 ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

This transaction consists of a 10-year, fixed-rate $350.0 million loan secured by Colorado Center in Santa Monica, California, that is interest only (IO) throughout the entire loan term. 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 totaling 1.2 million square feet and a three-level underground parking garage on a 15.0-acre plot of land. The property is approximately 1.5 miles northeast of downtown Santa Monica, in the heart of the city’s media and entertainment area.

The office park was originally built in 1984 and underwent renovations in 2004 and 2018. The sponsor, Boston Properties, Inc., injected $18.0 million of improvements into the property in 2018 to improve the subject’s overall marketability within the submarket. According to a “Los Angeles Business Journal” article published on June 28, 2019, the sponsor was embarking on a $40 million upgrade to the property’s common spaces, including a new gym and a food hall, both of which were open for business shortly after the article was published.

As of the September 2019 rent roll, the property was 97.8% occupied, which is higher than the YE2019 March occupancy rate of 95.7% and issuance occupancy rate of 90.9%. The three largest tenants are Hulu (22.1% of net rentable area (NRA)) with a lease expiry in November 2021; Edmunds.com Inc. (Edmunds; 16.8% of NRA) with a lease expiry in January 2028; and Rubin Postaer and Associates (RPA; 15.7% of NRA) with a lease expiry in December 2025. Home Box Office (HBO; 11.3% of NRA) signed an 18-month extension option to December 2020, at which point it will most likely move to its location in Culver City, California. The servicer stated that Hulu may lease HBO’s space when it becomes available. If Hulu does not backfill the space, however, the borrower will employ a more aggressive marketing effort. DBRS Morningstar has requested a leasing update from the servicer. The property serves as the headquarters for Hulu, Edmunds, RPA, and Kite Pharma, Inc. According to the Q3 2019 financials, the loan reported an annualized debt service coverage ratio (DSCR) of 3.19 times (x) compared with the YE2018 ratio of 2.60x and the DBRS Morningstar Term DSCR of 2.24x derived at issuance.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $43.8 million derived at issuance was accepted and a capitalization (cap) rate of 7.0% was applied, resulting in a DBRS Morningstar Value of $626.4 million. Based on the entire debt stack, the implied DBRS Morningstar LTV was 87.8%, which includes the senior and junior trust notes totalling $350.0 million and nonpooled senior trust notes totalling $200.0 million held outside the trust. The cumulative investment-grade-rated proceeds of $469.8 million reflect a DBRS Morningstar LTV of 75.0%.

DBRS Morningstar applied a cap rate at the lower end of its Cap Rate Ranges for office properties, reflecting the property’s location, high quality, and position in the market, which should provide insulation from market volatility to the property’s value over the loan term. In addition, the 7.0% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.3% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 3.0% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X-A is an IO certificate that references 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides 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.dbrsmorningstar.com The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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