DBRS Morningstar Assigns Ratings to Natixis Commercial Mortgage Securities Trust 2017-75B

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-75B issued by Natixis Commercial Mortgage Securities Trust 2017-75B (the Issuer) as follows:

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

-- Class XA at AAA (sf)
-- Class XB at A (high) (sf)
-- Class V1XB at A (high) (sf)
-- Class V1A at AAA (sf)
-- Class V1B at AA (sf)
-- Class V1C at A (sf)
-- Class V1D at BBB (low) (sf)
-- Class V1E at B (high) (sf)
-- Class V2 at B (high) (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about August 14, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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.

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.

The total $250.0 million financing consisted of $59.0 million of pooled trust debt, $84.0 million of a subordinated B note held in the trust, $33.0 million of nonpooled pari passu debt outside the trust, and $54.0 of a subordinated B note held outside the trust. The 10-year loan called for interest-only (IO) payments for the entire term with no amortization. The total mortgage debt of $230.0 million was supplemented by $20.0 of mezzanine debt.

Collateral for the loan is the fee simple interest in a 35-story Class B office tower in the Financial District of lower Manhattan. The property was developed in 1928 as the headquarters of ITT Inc. (formerly International Telephone & Telegraph) not long after the company was founded in 1920. Many architectural details remain from that time, including the large entrance lobby with hanging brass chandeliers, terrazzo and marble floors, fresco painted vaulted ceilings, brass cab elevators (with modernized controls and mechanics), and a separate domed mosaic entrance on the corner of Broad and William Streets used from time to time by the New York City high school tenant that controls the interior space. The 671,369-square-foot building has undergone recent renovations and upgrades to the lobby, elevator, and mechanical systems. The property is located along Broad Street within one block of the New York Stock Exchange and the National Museum of the American Indian and within a short walk to the World Trade Center complex, the New Jersey PATH commuter rail station, the Staten Island Ferry, and Fulton Street Subway Station with access to approximately nine subway lines and several bus lines all converging in lower Manhattan. The property is surrounded by a revitalizing neighborhood with other office buildings, large apartment and condominium buildings, restaurants, sports facilities, entertainment, cultural and tourist attractions, multiple transportation options, and places for outdoor recreation.

As of April 2020, Reis, Inc. (Reis) reported occupancy in the building at 87.1%. The April 30, 2020, rent roll shows occupancy at 86.0%. Tenants included the Board of Education of the City School District of the City of New York and AT&T Inc. Internap Corporation departed when its lease expired at the end of 2018. According to the 2017 appraisal, the submarket vacancy was 8.1%. Reis placed the Downtown Manhattan office market vacancy at 9.4% in 2017 and 10.5% in Q4 2019, and expected vacancy to trend slightly higher through the end of 2020 before the impact of the Coronavirus Disease (COVID-19).

The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was 13.2 million and a cap rate of 7.00% was applied, resulting in a DBRS Morningstar Value of $188.9 million, a variance of -53.1% from the appraised value at issuance of $403.0 million. The DBRS Morningstar Value implies an LTV of 121.8% on the total mortgage debt of $230.0 million compared with the LTV of 57.1% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -16.6% variance from the Issuer’s NCF, primarily driven by estimated annual leasing costs, vacancy assumptions, and utilities expense.

The Q4 2019 Operating Statement Analysis Report reported a NCF of $13.9 million, roughly $1.96 million less than the Issuer’s underwritten NCF at issuance and $0.67 million more than the DBRS Morningstar reanalyzed NCF estimate.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s location in Manhattan’s Financial District, history of stable occupancy, as well as stable cash flow with the large New York City public school tenant, below-market rents, and its ability to attract the technology sector with high-speed national and international telephone and Internet services. In addition, the 7.00% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 3.9% based on the Issuer’s underwritten NCF and appraised value and within the range of DBRS Morningstar office cap rates for similar-quality buildings in the Financial District submarket.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 2.50% to account for cash flow volatility, property quality, and market fundamentals. The DBRS Morningstar rating is three notches higher than the final LTV sizing benchmarks after all adjustments because of the historically stable occupancy in the office submarket and at the property, albeit with a recent large tenant departure affecting DBRS Morningstar’s cash flow analysis; the rental stability offered by the New York City public school tenant; as well as the property’s highly visible location, strong sponsor, and long-term ownership.

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.

Classes XA, XB, and V1XB 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 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 www.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 www.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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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].

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277