DBRS Morningstar Confirms All Classes of Morgan Stanley Capital I Trust 2017-HR2

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-HR2 issued by Morgan Stanley Capital I Trust 2017-HR2 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-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class X-D at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (high) (sf)
-- Class G-RR at BB (low) (sf)
-- Class H-RR at B (sf)

All trends are Stable.

The rating confirmations reflect the transaction’s overall stable performance since issuance, when the transaction consisted of 42 fixed-rate loans secured by 82 commercial and multifamily properties, with a trust balance of $942.7 million. According to the October 2021 remittance report, all loans remain in the pool and there has been negligible amortization to date.

According to the October 2021 remittance, one loan, representing 1.0% of the pool, is in special servicing and nine loans, representing 23.6% of the pool, are on the servicer’s watchlist. These loans are being monitored for various reasons including deferred maintenance, low debt service coverage ratio (DSCR), and Coronavirus Disease (COVID-19) relief requests. In addition, DBRS Morningstar also notes that the pool has a moderate concentration of hospitality and retail properties, representing 10.8% and 30.1% of the pool balance, respectively. The initial impact of the coronavirus pandemic has affected these property types most severely and, as such, those concentrations suggest slightly increased risks for the pool, particularly at the lower rating categories, since issuance.

The 260-272 Meserole loan (Prospectus ID#12, 2.6% of the pool), is secured by a 70,475-square-foot mixed-use industrial/commercial loft space property in Brooklyn, New York. The loan was previously transferred to the special servicer in September 2020, because of monetary default as a result of the coronavirus pandemic. In October 2020, the property was reappraised at a value of $17.8 million, representing a 46.1% decline from the issuance value of $33.0 million. Despite the significant drop in value, the borrower brought the loan current, and it was returned to the master servicer in September 2021. The loan was subsequently placed on the watchlist in September 2021 because of ongoing coronavirus-related hardships. The mixed-use property offers 155 individual studio loft spaces for musicians to lease as recording studio space on an annual basis. The collateral has historically reported occupancy rates of at least 90%; however, occupancy dropped to 84% as of Q2 2021. The loan most recently reported a DSCR of 1.30 times as of Q1 2020. DBRS Morningstar has requested partial year 2021 and YE2020 financials.

The only specially serviced loan in the pool, Eagle Village Apartments (Prospectus ID#28, 1.0% of the pool), is secured by a 128-unit student housing complex in Evansville, Indiana. The loan was transferred to special servicing in November 2020 because of payment default and was delinquent from February 2021 to September 2021. Occupancy has been severely affected because of classes moving online and a decline in demand for student housing amid the pandemic. As of the February 2021 rent roll, the latest available, occupancy was 43.8%. The lender granted forbearance in May 2021, which included a seven-month deferral of principal, interest, and reserve payments, with repayment beginning in September 2021 spread out over 14 months. The loan continues to perform pursuant to the forbearance agreement. An updated appraisal as of December 2020 showed the property’s value increased to $13.6 million, up from $12.8 million at issuance.

At issuance, The Woods (Prospectus ID#2; 9.1% of the pool) was shadow-rated investment grade and, in its analysis for this review, DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade characteristics.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 26, 2021), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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