DBRS Morningstar Confirms Ratings on MSC 2017-H1, Removes Six Ratings from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-H1 issued by Morgan Stanley Capital I Trust 2017-H1 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-5 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 (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at A (sf)
-- Class D at A (low) (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BBB (low) (sf)
-- Class G-RR at BB (low) (sf)
-- Class H-RR at B (low) (sf)

DBRS Morningstar also removed the ratings on Classes D, E-RR, F-RR, G-RR, H-RR , and X-D from Under Review with Negative Implications, where they were placed on August 6, 2020. Classes G-RR and H-RR have Negative trends to reflect the continued performance challenges to the underlying collateral, many of which the Coronavirus Disease (COVID-19) pandemic has driven. The trends on all other classes are Stable.

The rating confirmations reflect the stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations at issuance. The pool’s collateral is unchanged since issuance, still consisting of 58 loans secured by 89 properties. As of the January 2021 remittance, the pool had an aggregate principal balance of $1.09 billion, representing a collateral reduction of 2.1% since issuance resulting from scheduled amortization.

There are 10 loans, representing 15.2% of the pool, with the special servicer, the largest of which, Hyatt Regency Austin (Prospectus ID#6, 4.03% of the pool) is secured by 448-room full-service hotel located in Austin, Texas. The loan 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 January 2021 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 YE2019 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. Given the recent developments, DBRS Morningstar increased the probability of default for this loan to capture the increased credit risk to the trust.

The Magnolia Hotel Denver (Prospectus ID#9, 3.56% of the pool) transferred to special servicing in May 2020 for imminent monetary default after the borrower requested pandemic-related relief. The loan is secured by a 297-room full-service boutique hotel in the central busines district of Denver. While the YE2019 NCF was down 13% from issuance levels, the loan was still covering at a stable debt service coverage ratio (DSCR) of 1.38 times. The loan was modified in November 2020; terms included a four-month deferral of principal and interest, an additional deferral of principal through May 2022, a temporary waiver of DSCR covenants, and a two-year maturity extension to May 2024. The property was reappraised in July 2020 at $62.9 million, which reflects a 34.2% decline from the appraised value at issuance and implies a loan-to-value of 81.5%.

There are 13 loans, representing 25.1% of the pool, are on the servicer’s watchlist and highlighted by the pool’s largest loan, Market Street - The Woodlands (Prospectus ID#1, 6.09% of the pool). The loan, which is secured by a 492,082-square-foot mixed-use retail and office property in The Woodlands, Texas, a suburb of Houston, is being monitored after the borrower requested pandemic-related relief. The property’s performance had been trending downward as the YE2019 NCF declined by 7% since issuance. The trend is expected to continue as the occupancy decreased to 87% as of June 2020, down from 96% at YE2019. The property’s largest tenant, H-E-B Woodlands Market, is a supermarket chain that has been a tenant since 2004 and accounts for 16.8% of the property’s net rentable area. The lease for H-E-B expires in July 2024 and includes four five-year renewal options.

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 loan in the transaction:

-- Prospectus ID#6 – Hyatt Regency Austin (4.03% 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 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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