DBRS Morningstar Assigns Ratings to CSAIL 2017-CX10 Commercial Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the nonpooled rake bonds of the Commercial Mortgage Pass-Through Certificates, Series 2017-CX10 issued by CSAIL 2017-CX10 Commercial Mortgage Trust (the Issuer) as follows:

-- Class UES-A at BBB (low) (sf)
-- Class UES-B at BB (low) (sf)
-- Class UES-C at B (sf)
-- Class UES-D at B (low) (sf)
-- Class UES-X at B (high) (sf)
-- Class V1-UESA at BB (low) (sf)
-- Class V1-UESD at B (sf)
-- Class V2-UES at B (low) (sf)
-- Class STN-A at AA (low) (sf)
-- Class STN-B at A (low) (sf)
-- Class STN-C at BBB (low) (sf)
-- Class STN-X at A (sf)
-- Class V1-STNA at A (low) (sf)
-- Class V1-STNC at BBB (low) (sf)
-- Class V2-STN at BBB (low) (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 September 7, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 Yorkshire and Lexington Towers Loan-Specific Certificates, or the Yorkshire and Lexington Towers loan, consist of six classes of certificates. The ratings on these certificates reflect the sustainable cash flow and value for the property securing the Yorkshire and Lexington Towers loan that the trust holds, including structural features such as additional debt and lack of amortization, and qualitative factors, such as our opinion of the underlying collateral quality, the current and expected performance of the real estate market in which the properties are located, as well as the macroeconomic environment and its potential impact on the performance of commercial properties.

The Yorkshire and Lexington Towers loan refinanced the acquisition of two apartment buildings with a combined 827 units, located in Manhattan’s Upper East Side neighborhood. The sponsors (The Chetrit Group, LLC and Stellar Management, LLC) purchased the assets in 2014 for $485.0 million from a group associated with Leona Helmsley’s estate. At that time, the buildings were 78.7% occupied and contained 379 rent-stabilized units. According to appraisals, the buildings generated $12.2 million of net operating income, implying a capitalization rate of 2.51%.

In 2017, Natixis Real Estate Capital LLC (Natixis) and UBS Group AG originated the five-year, interest-only (IO) $550.0 million loan, $400.0 million of which is held within various mortgage trusts and $150.0 million of which is mezzanine debt. The loan facilitated the payoff of acquisition financing, funded upfront reserves, and closing costs as well as returned more than $124.0 million in equity, which leaves the sponsors without any equity remaining in the deal. DBRS Morningstar assigned ratings for the certificates backing the $200.0 million Yorkshire & Lexington Rake Promissory B Note.

As of YE2019, the servicer reported a net cash flow (NCF) figure of approximately $21.3 million. DBRS Morningstar applied a 3.0% haircut to the YE2019 NCF figure reported by the Issuer. The resulting DBRS Morningstar NCF was $20.6 million and a cap rate of 6.0% was applied, resulting in a DBRS Morningstar Value of $343.7 million, a variance of -61.4% from the appraised value at issuance of $890.0 million. The DBRS Morningstar Value implies an LTV of 160.0% compared with the LTV of 61.8% on the appraised value at issuance.

The cap rate applied to the Yorkshire and Lexington Towers loan is at the lower end of the DBRS Morningstar Cap Rate Ranges for multifamily properties, reflecting the collateral’s location in New York’s Upper East Side and the favorable asset quality. In addition, the 6.0% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 2.7% 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 4.0% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for certain secured debt LTV and mezzanine debt penalties.

The Standard High Line NYC Loan-Specific Certificates, or the Standard Hotel loan, are collateralized by a 10-year, fixed-rate loan secured by the borrower’s (GC SHL, LLC) fee simple interest in the high-end boutique Standard, High Line Hotel in Manhattan, which contains 338 rooms. Natixis originated the loan, which has a maturity date of October 5, 2027. The single mortgage loan is evidenced by four separate promissory notes with a principal balance of $170 million, including a A-A note totalling $45.0 million, a subordinated A-B note totalling $58.4 million, a B-A note with a principal balance of $36.6 million, and a B-B note with a principal balance of $30.0 million. The loan has an initial term of 120 months and bears a fixed rate of 4.73% with IO payments for the full term. The A-A note is included in the trust and serves as collateral for the pooled certificates. The $58.4 million subordinated A-B note serves as collateral for the rake bonds that DBRS Morningstar rates. The B-A and B-B notes are not included in the trust.

The total financing, along with the borrower’s equity contribution, facilitated its acquisition of the hotel for a purchase price of $340.0 million. The borrower also serves as the loan sponsor and is controlled by Goodwin Gaw, the founder of Gaw Capital Partners, a Hong Kong-based real estate private equity firm. Gaw Capital Partners is ranked the 19th-largest real estate private equity fund in the world, according to Private Equity Real Estate, with more than $12.8 billion of assets under management as of Q1 2017. The purchase of the hotel represented the firm’s 11th hotel investment. The sponsor contributed $172.6 million of equity into the purchase of the property, accounting for more than 50% of the purchase price.

The hotel’s location on Manhattan’s far west side in the Meatpacking District, an area that boasts an abundance of amenities and demand drivers, is excellent. The neighborhood’s wide range of high-end retailers, restaurants, bars, and other attractions are important draws for the hotel’s clientele. The district, which is bordered by Chelsea to the north and the West Village to the south, is home to the Whitney Museum of American Art, one of New York’s most famous art institutions. The High Line, a nearly 1.5-mile elevated park, runs through the district and is a popular local amenity. A handful of corporations have a presence in the district, including Google LLC, WeWork, and Samsung Electronics Co., Ltd.

Notwithstanding its high quality, amenities, and location, the hotel’s operating trends have slipped over the past three years and overall NCF has dropped substantially since the initial securitization. Steadily declining room revenues have been amplified by massive declines in food and beverage (F&B) revenues which, per the servicer report, fell by more than 17.4% between YE2017 and YE2019 after reportedly falling by 9.4% between YE2015 and the last 12 months ended July 31, 2017. The hotel’s competitive set also experienced a decline over the same period, but to a lesser degree as the delivery of thousands of new hotel rooms to Manhattan over the past few years is having a negative impact on hotels citywide. Between YE2017 and YE2019, the asset’s operating expense ratio also increased to 89.1% from 81.5%. The combined steady decline in room revenue, drop-off in F&B revenue, and rise in expenses in recent years have ultimately resulted in a 53.7% decline in NCF between YE2017 and YE2019 per the servicer report.

As of YE2019, the servicer reported a NCF figure of approximately $6.6 million for The Standard Hotel. DBRS Morningstar applied a 3.0% haircut to the YE2019 NCF figure reported by the Issuer. The resulting figure was $6.4 million and a cap rate of 7.5% was applied, resulting in a DBRS Morningstar Value of nearly $85.8 million, a variance of -53.1% from the appraised value at issuance of $340.0 million. However, DBRS Morningstar ultimately floored the Standard Hotel loan value at $159.6 million after applying a 5.0% discount to the appraiser’s estimated land value of $168.0 million. The resulting DBRS Morningstar Value of $159.6 million implies an LTV of 106.5% compared with the LTV of 50.0% on the appraised value at issuance.

The cap rate applied to The Standard Hotel loan is at the lower end of the DBRS Morningstar Cap Rate Ranges for full-service hotel properties, reflecting the collateral’s location in New York City’s far west side and the generally favorable asset quality. In addition, the 7.5% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.2% 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. DBRS Morningstar also made other negative adjustments to account for certain subordinate debt and total secured debt LTV penalties.

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 STN-X and UES-X 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.

DBRS Morningstar notes that this press release was amended on July 11, 2023, to correct the IO certficates to Classes STN-X and UES-X.

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].

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