DBRS Morningstar Confirms All Classes of HFX Funding 2017-1

DBRS Limited (DBRS Morningstar) confirmed all classes of the Notes issued by HFX Funding 2017-1 (the Issuer), as listed below:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. The pool consists of 18 performing loans, secured by traditional commercial real estate properties with a combined principal balance of $246.2 million. At closing in October 2017, the transaction featured a funding period whereby the Issuer could contribute loans to the pool, which was expected to be funded to the $300.0 million maximum balance within six months of closing. The Issuer extended the funding period multiple times with the most recent expiration date in February 2020. DBRS Morningstar received confirmation from the Issuer that the pool became static in June 2020 and is now considered to be fully funded at 82.0% of the of the originally planned $300.0 million pool balance. The transaction pays sequentially.

In terms of the pool composition, there is a higher concentration of multifamily, mixed-use, and retail properties representing 25.7%, 25.1%, and 16.6% of the current pool balance, respectively. The location of the subject properties are concentrated in California, Colorado, and Texas, representing 24.0%, 16.1%, and 14.5% of the current pool balance, respectively. All of the loans have five- to seven-year terms and 41.4% of the pool is full-term interest only (IO), while the remaining loans have partial IO terms, ranging from one year to four years.

DBRS Morningstar analyzed newly funded loans to ensure the underlying collateral meets the Target Enhancements set forth by the loan documents in conjunction with its annual surveillance review. According to August 2020 reporting, there is one loan in special servicing, Prospectus ID#1 - Storrs Center Phase II, which represents 3.6% of the current pool balance, and there are no loans on the servicer’s watchlist. The specially serviced loan is secured by an unanchored retail property located in Storrs, Connecticut, which serves the University of Connecticut. The loan transferred to special servicing in May 2020 and as of the August 2020 remit, the loan is over 90 days delinquent. The subject reported an increase in vacancy prior to the Coronavirus Disease (COVID-19) pandemic as two of the largest tenants, collectively representing 31.6% of the net rentable area (NRA), vacated the subject; however, one tenant, Amazon (11.3% of NRA), has its lease backed by a corporate guarantee through to February 2026. As a result of Amazon’s departure, the borrower deposited $300,000 into a reserve to backfill the space, in return for a nine-month delay to cash management as current performance would have triggered a full cash sweep. The subject has experienced cash flow challenges as a result of coronavirus as traffic to the property is dependent on student and faculty presence on campus. DBRS Morningstar provides in-depth commentary on the current status and performance of the loan on its CMBS Viewpoint platform.

Majority of loans are reporting YE2019 financials and based on those figures, the pool reported a weighted-average debt service coverage ratio (DSCR) of 1.67 times (x), compared with the DBRS Morningstar Term DSCR of 1.32x.

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.

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 the following loans in the transaction:

-- Prospectus ID#1 – Storrs Center Phase II (3.6% of the pool)
-- Prospectus ID#5 – Khoshbin’s Landing (6.6% of the pool)
-- Prospectus ID#11 – 365 W Passaic (8.1% of the pool)
-- Prospectus ID#15 – Tennyson Apartments (6.0% of the pool)
-- Prospectus ID#18 – Cross Creek Apartments (7.7% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 6, 2020), 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.

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 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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