DBRS Morningstar Confirms Ratings on All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33, Removes Two Classes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-C33 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (low) (sf)

With this review, DBRS Morningstar removed the ratings on Classes E and F from Under Review with Negative Implications, where they were placed on August 6, 2020. The trends on these classes are Negative. In addition, DBRS Morningstar changed the trends on Classes B, C, D, X-B, and X-D to Negative from Stable. All other trends remain Stable.

The Negative trends reflect the continued performance challenges facing the underlying collateral, much of which has been driven by the impact of the Coronavirus Disease (COVID-19) global pandemic. In addition to the four loans in special servicing, representing 17.3% of the current pool balance, as of the December 2020 remittance, DBRS Morningstar notes that the pool has a high concentration of retail and hospitality properties, representing 29.6% and 12.8% of the pool balance, respectively. The coronavirus pandemic has affected these property types most severely and, as such, those concentrations suggest increased risks for the pool, particularly at the lower rating categories, since issuance.

As of the December 2020 remittance, all 44 of the original loans remain in the pool, with a collateral reduction of 2.9% since issuance as result of loan amortization. All four loans in special servicing transferred as a result of ongoing difficulties caused by the coronavirus pandemic. Two of these loans, Hyatt Regency Austin (Prospectus ID#1, 8.8% of the current pool balance) and Holiday Inn Express Quakertown (Prospectus ID#33, 0.9% of the current pool balance) were 121+ days delinquent, while the remaining two loans, Key Center Cleveland (Prospectus ID#5, 5.7% of the current pool balance) and Gateway Crossing (Prospectus ID#13, 2.0% of the current pool balance) were current. The servicer commentary indicates that the Gateway Crossing loan was returned to the master servicer in early December 2020.

Hyatt Regency Austin is secured by a 448-key full-service hotel in Austin, Texas. The loan was transferred to special servicing in August 2020 for imminent default following notice that the property would no longer be able to support operations going forward. According to the December 2020 reporting, forbearance terms have been approved and an agreement is currently pending the borrower’s execution. Performance at the property had been strong prior to the pandemic, yielding a year-end 2019 net cash flow (NCF) of $17.3 million, representing a 41.8% increase when compared with the DBRS Morningstar NCF derived at issuance of $12.2 million and a 26.2% increase over the issuer’s NCF. However, performance dropped precipitously during the first half of 2020 and led to the borrower’s request for relief. While the borrower has historically shown a strong commitment to the property, DBRS Morningstar highlighted concerns relating to the guarantor’s limited financial wherewithal and relatively small hotel real estate portfolio at issuance. Given the recent developments, DBRS Morningstar increased the probability of default for this loan to capture the increased credit risk to the trust.

Key Center Cleveland is secured by a mixed-use property in downtown Cleveland, comprising two interconnected office buildings, a 400-key Marriott hotel, and a 985-space underground parking garage. The loan was transferred to special servicing in November 2020 for imminent default at the borrower’s request. As noted above, the loan was current as of December 2020 reporting, and negotiations for temporary relief are underway. As of June 2020, the loan reported an annualized NCF of $17.8 million, representing a 38.5% decline when compared with the year-end 2019 figure of $28.9 million. While cash flow had been trending positive since issuance prior to the most recent reporting, the decline comes primarily as a result of lost revenue from the hotel and parking portions of the collateral amid the pandemic, which is likely to remain depressed during the short term. Additionally, the property’s largest tenant, KeyBank (31.8% of the net rentable area (NRA), expiring June 2030), downsized by 44,000 square feet (3.2% of the NRA) in July 2020 after giving the required 12 months’ notice; a $2.1 million fee was collected upon notice in 2019. While there is a three-year lockout before the tenant can contract its footprint further, KeyBank retains two more identical options, allowing the tenant to downsize by 103,000 square feet total. While it appears likely that a coronavirus-related forbearance may be granted, the uncertainty caused by the pandemic and the additional contraction options for the largest tenant increase the loan’s risk profile.

There are also seven loans, representing 11.5% of the current pool balance, on the servicer watchlist which were generally added for performance declines related to increased vacancy or rent collection issues as a result of the impact of the coronavirus. The largest loan on the servicer’s watchlist, Centre at Westbank (Prospectus ID#11, 3.0% of the current pool balance), was most recently flagged following the borrower’s request for relief as a result of the effect of the coronavirus on loan performance and debt service obligations. Per the December 2020 reporting, the borrower has withdrawn their request for relief and the loan is expected to be removed from the servicer’s watchlist in the near term.

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 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 – Hyatt Regency Austin (8.8% of the current pool balance)
-- Prospectus ID#5 – Key Center Cleveland (5.7% of the current pool balance)

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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