DBRS Morningstar Takes Rating Actions on CD 2017-CD6 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded its ratings on the following Commercial Mortgage Pass-Through Certificates, Series 2017-CD6 issued by CD 2017-CD6 Mortgage Trust and removed them from Under Review with Negative Implications, where they were placed on August 6, 2020:

-- Class F-RR to BB (low) (sf) from BB (high) (sf)
-- Class G-RR to B (sf) from BB (low)

In addition, DBRS Morningstar confirmed the following ratings:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-D at A (high) (sf)
-- Class D at A (sf)
-- Class E-RR at BBB (sf)

DBRS Morningstar also changed the trend on Class E-RR to Negative from Stable. The trends on Classes F-RR and G-RR are Negative while all other trends are Stable. DBRS Morningstar also discontinued the rating on Class A-1 because the class was fully repaid.

The rating downgrades and Negative trends reflect the continued performance challenges facing the underlying collateral largely driven by the Coronavirus Disease (COVID-19) global pandemic. As of the November 2020 remittance, eight loans are in special servicing, representing 18.8% of the pool. DBRS Morningstar notes that the pool also has a higher concentration of hospitality properties, representing 18.3% of the pool. The initial effects of the coronavirus pandemic have affected hospitality properties most severely and, as such, the high concentration in this pool suggests increased risks since issuance, particularly for the lower rating categories.

In addition, the transaction has a higher concentration of retail properties with 16 loans secured by regional malls as well as anchored and unanchored retail properties, collectively representing 18.3% of the pool. Of the six loans on the servicer’s watchlist, representing 12.5% of the pool, all but one are secured by hotel and retail properties. Office collateral makes up the largest property-type concentration with 15 loans comprising 30.6% of the pool.

The eight loans in special servicing are Headquarters Plaza (Prospectus ID#1; 7.4% of the pool), Lightstone Portfolio (Prospectus ID#6; 6.0% of the pool), Promenade at West End Phase II (Prospectus ID#21; 2.1% of the pool), Hampton Inn Majestic Chicago (Prospectus ID#20; 2.0 % of the pool), Gurnee Mills (Prospectus ID#27; 1.4% of the pool), Hampton Inn Hilton Head (Prospectus ID#41; 0.9% of the pool), Holiday Inn & Suites Albuquerque Airport (Prospectus ID#45; 0.7% of the pool), and Lakeridge Commons (Prospectus ID#48; 0.5% of the pool). All of these loans were recent transfers to special servicing and the special servicer obtained updated appraisals for seven of the eight loans. Value declines in the most recent appraisals for these loans ranged from -17.7% to -48.8%, increasing the implied loan-to-value (LTV) ratio for the loans with the sharpest declines.

The largest loan in special servicing, Headquarters Plaza, is secured by the borrower’s fee and leasehold interests in a mixed-use property in Morristown, New Jersey. The collateral comprises three office towers totaling 562,242 square feet (sf), which includes 167,274 sf of ground-floor retail space and a 256-key Hyatt Regency hotel, which are connected via enclosed corridors. Such improvements sit atop a multistory above- and below-grade 2,900-space parking garage that does not serve as collateral for the loan. The loan sponsors are the property’s original developers and, at issuance, DBRS Morningstar noted that the loan sponsors had invested approximately $45.7 million in capital improvements for the property since 2005. The property’s retail component features interior and outdoor-facing retail suites, an AMC theatre, and a fitness facility known as The Club at Headquarters Plaza. The collateral’s hotel portion was added to the subject complex in 1993 and includes 31,000 sf of meeting and banquet space; a 4,984-sf conference center; a small indoor pool; a fitness and business center; and three food and beverage outlets.

Prior to the coronavirus pandemic, the hotel was outperforming its competitive set and was the dominant hotel in the market; however, the pandemic has caused significant declines in hotel demand at the property and most others across the United States. As a result, the loan transferred to special servicing in June 2020 for coronavirus-related payment default. The property was appraised in August 2020 for $158.6 million, a 33.6% decline from the issuance valuation of $239.0 million, largely because of the sharp decline in the hospitality portion’s assigned value. Using the most recent value, the current implied LTV is 94.6%, up from 62.8% at issuance. Given the value decline and ongoing slump in business travel, this loan was liquidated from the pool in DBRS Morningstar’s analysis, resulting in an implied loss severity of approximately 15.0% based on a 10% haircut to the appraised value and a stressed advanced figure to increase the trust exposure. Overall, DBRS Morningstar believes that the long-term ownership and implied value exceeding the loan balance should incentivize the sponsor to continue working with the special servicer to find a resolution, which will likely include a loan modification. However, the value decline since issuance is a noteworthy increased risk for the pool from issuance, justifying the liquidation analysis.

For the remaining loans in special servicing, DBRS Morningstar applied a probability of default penalty to increase the expected loss in the analysis. In general, the resulting expected loss figures were well above the pool average, supported by the value declines and other increased risks to the pool since issuance for these loans.

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.

DBRS Morningstar materially deviated from its principal methodology when determining the rating assigned to Class C. The material deviation is warranted given the uncertain loan-level event risk.

Classes X-A, X-B, and X-D are interest-only (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 the following loans in the transaction:

-- Prospectus ID#1 – Headquarters Plaza (7.4% of the pool)
-- Prospectus ID#6 – Lightstone Portfolio (6.0% of the pool)
-- Prospectus ID#20 – Hampton Inn Majestic Chicago (2.0% of the pool)
-- Prospectus ID#27 – Gurnee Mills (1.4% 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 info@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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