DBRS Morningstar Confirms Ratings on Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-BNK3 issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3 as follows:

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

All trends are Stable. DBRS Morningstar also removed Class F from Under Review with Negative Implications, where it was placed on August 6, 2020.

As of the January 2021 remittance, all 63 original loans remain in the pool. Three loans, representing 2.0% of the current pool balance, are fully defeased. Two loans, representing 2.1% of the current pool balance, are in special servicing. Additionally, 22 loans, representing 35.4% of the current pool balance, are on the servicer’s watchlist. These loans are being monitored for low debt service coverage ratios (DSCR) and/or occupancy issues generally caused by disruptions related to the Coronavirus Disease (COVID-19) pandemic.

Of the 22 loans on the servicer’s watchlist, nine are backed by retail properties (9.2% of the pool), three by hospitality properties (8.3% of the pool), four by mixed-use properties (8.0% of the pool), three by office properties (5.6% of the pool), and three by industrial and self-storage properties. All three loans backed by hospitality properties have been flagged for considerable cash flow declines as a result of the coronavirus pandemic. Although the pandemic-related stress that is affecting the collateral hotels in this pool generally indicates increased risks since issuance, DBRS Morningstar notes that the historically strong performance of the underlying hotels and the lack of delinquency are stabilizing factors for the transaction.

At issuance, two loans, representing 7.2% of the current pool balance, were shadow-rated investment grade. These loans include 85 Tenth Avenue Center (Prospectus ID #4; 5.2% of the pool) and Potomac Mills (Prospectus ID #14; 2.2% of the pool). With this review, DBRS Morningstar confirms that the performance of these loans remains consistent with investment-grade loan characteristics.

Although the overall performance for the transaction remains generally stable, DBRS Morningstar notes that the pool has a moderate concentration of hospitality properties, representing 11.9% of the current pool balance. Hospitality properties have been the most severely affected by the initial impact of the coronavirus pandemic. The pool is also concentrated in loans secured by retail properties, which represent 29.6% of the current pool balance. Much like hospitality properties, retail properties have been among the most significantly affected by the pandemic. As such, these loans are being monitored closely.

Both of the loans in special servicing transferred for payment default in June 2020. The largest of these loans is the Holiday Inn Express King of Prussia (Prospectus ID#25; 1.2% of pool), which is secured by a 155-key limited-service hotel in King of Prussia, Pennsylvania. According to the servicer, the loan was past due for the April 2020 payment, but reserve funds were applied to past-due principal and interest. As such, the loan remained over 90 days delinquent from July 2020 to October 2020 when foreclosure was filed, followed by a motion for receivership in November 2020. The Q3 2020 DSCR was reported at 0.57 times (x) with an occupancy rate of 37% compared with 2.32x at YE2019 with an occupancy rate of 66%; however, DBRS Morningstar notes that the loan’s strong historical performance, with DSCRs ranging from 2.01x to 2.32x since issuance, is a mitigating factor. According to the September 2020 appraisal, the property value was reported at $15.3 million, a relatively moderate 11.6% decline compared with the issuance value of $17.3 million. Although the 2020 appraisal implies value outside the loan balance, given the extended delinquency and continued challenges for hospitality properties amid the coronavirus pandemic, DBRS Morningstar analyzed this loan with an increased probability of default (POD) to significantly increase the expected loss for this review.

The smaller specially serviced loan, Holiday Inn Express – Garland, TX (Prospectus ID#31; 0.9% of pool), is secured by a 98-key limited-service hotel in the Dallas suburb of Garland, Texas. The loan remained over 90 days delinquent from July 2020 to November 2020, but recently became current with the January 2021 payment. The loan should be returned to the master servicer once three consecutive payments are made on time. Although the loan is not reporting quarterly financials, the YE2019 DSCR was reported at 1.46x with an occupancy rate of 70%. Historically, the DSCR has ranged from 1.18x to 1.62x with occupancy rates reported between 69% and 74% since issuance. According to the August 2020 appraisal, the property value was reported at $11.2 million, a 22.8% decline compared with the issuance value of $14.5 million, but above the loan balance of approximately $9.0 million. Like the other loan in special servicing, DBRS Morningstar analyzed this loan with an increased POD to increase the expected loss for this review.

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.

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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