DBRS Morningstar Confirms all Classes of CSAIL 2017-C8 Commercial Mortgage Trust, Maintains Nine Negative Trends

DBRS Limited (DBRS Morningstar) confirmed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-C8 issued by CSAIL 2017-C8 Commercial Mortgage Trust as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class V1-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class V1-B at A (sf)
-- Class D at BBB (sf)
-- Class V1-D at BBB (sf)
-- Class E at B (high) (sf)
-- Class F at B (sf)

Classes D, V1-D, E, and F continue to carry Negative trends, largely reflective of the six loans, representing 25.9% of the current trust balance, in special servicing. All other trends remain Stable. DBRS Morningstar also removed the Interest in Arrears designation from Class F.

In addition, DBRS Morningstar confirmed its ratings on the following rake bonds, which are secured by the beneficial interest in the subordinate debt placed on the 85 Broad Street loan:

-- Class 85BD-A at AA (low) (sf)
-- Class V1-85A at AA (low) (sf)
-- Class 85BD-B at A (low) (sf)
-- Class V1-85B at A (low) (sf)
-- Class 85BD-C at BBB (low) (sf)
-- Class V1-85C at BBB (low) (sf)
-- Class V2-85 at BBB (low) (sf)

Classes 85BD-B, 85BD-C, V1-85B, V1-85C, and V2-85 continue to carry Negative trends given the recent downsizing of WeWork as discussed below.

As of the December 2021 remittance, 30 of the original 32 loans remain in the pool, with an aggregate principal balance of $790.3 million, representing a collateral reduction of 10.5% since issuance because of loan amortization and the repayment of two loans including the Apple Sunnyvale loan, the third-largest loan in the pool at issuance. An additional two loans, representing 1.8% of the current trust balance, are fully defeased. The transaction is concentrated by property type as eight loans, representing 39.9% of the current trust balance, are secured by office properties. As noted above, there are six loans, representing 25.9% of the current trust balance, in special servicing. In its analysis for this review, DBRS Morningstar liquidated one loan, with projected losses exceeding $5.0 million contained to the nonrated loss piece.

The largest of these six loans, 245 Park Avenue (Prospectus ID#2; 11.1% of the pool), is also the largest loan in the pool and transferred to special servicing with the November 2021 remittance after the sponsor filed for Chapter 11 bankruptcy in October 2021. According to an October 2021 Bloomberg article, the sponsor filed for Chapter 11 bankruptcy because the property manager had been unable to backfill Major League Baseball’s (MLB) space (12.6% of net rentable area) after MLB vacated the property in January 2020 ahead of its October 2022 lease expiration (a departure that was known to be forthcoming at issuance). The December 2020 rent roll showed that the property was 93.2% occupied with an average base rent of $79.72 per square foot (psf), compared with the 91.2% occupancy rate and $80.72 psf average base rent at issuance. The loan sponsor is HNA Group, a China-based Fortune 500 company that was relatively new to owning and managing commercial real estate at issuance.

The collateral benefits from its location in one of Manhattan’s premier office corridors and its accessibility to Grand Central Terminal. The subject’s historical occupancy rate has remained above 90% for several years, largely because of the long-term leases to investment-grade tenants. The loan includes a springing cash management lockbox that was triggered when MLB vacated in 2020, and the tenant reserve balance totalled $26.3 million as of November 2021. DBRS Morningstar anticipated the possibility of the MLB space going completely vacant and acknowledged MLB’s above-market rents at issuance. The loan’s transfer to the special servicer is primarily related to borrower-associated issues rather than the collateral’s credit profile. Tenant reserves will continue accruing until MLB’s lease expires, and the current balance provides a sufficient tenant improvement package of $119 psf for the MLB space to attract a new tenant. DBRS Morningstar will continue to monitor leasing and sponsor updates, but the low leverage for the senior loan, with its issuance loan-to-value ratio (LTV) of 48.9%, suggests the overall risk profile remains healthy.

The second-largest loan in special servicing, Hotel Eastlund (Prospectus ID#5; 5.5% of the pool), is secured by a 168-room, full-service hotel in Portland, Oregon. The loan transferred to special servicing in July 2020 for payment default, and the servicer has confirmed a loan modification is pending. Terms include a retroactive interest-only (IO) period from January 2021 through December 2021, with the borrower repaying the deferred amounts in 12 equal installments beginning in January 2022, while also resuming regular principal and interest payments. According to the servicer, the borrower is motivated to retain ownership of the hotel and has contributed $2.5 million in new equity since default, in addition to the $1.5 million spent on recent renovations, leaving the property in excellent condition. As of October 2021, the property was appraised at $50.7 million, reflecting a 26.1% decline from the issuance value of $68.6 million. Based on the appraised value and the current loan amount, the LTV is moderately high at 78.6%.

There are currently six loans, 21.2% of the current trust balance, on the servicer’s watchlist. While the majority of these loans are on the watchlist for non-performance-related reasons, DBRS Morningstar is monitoring the largest of these loans, Ritz Carlton Rancho Mirage (Prospectus ID#4, 7.5% of the current trust balance), which is secured by a 244-room, full-service hotel in Rancho Mirage, California. The servicer added the loan to its watchlist in September 2020 following a decline in performance and a request for Coronavirus Disease (COVID-19) pandemic-related relief. Per a trailing three months (T-3) ended June 2021 STR report, the property’s occupancy rate was 47.4% compared with its competitive set at 41.7%, and the hotel was outperforming its competitive set with a T-3 revenue per available room penetration of 153.0%. The property has seen an increase in occupancy rates as travel restrictions have eased across the country for leisure travel, which makes up most of the hotel’s demand segmentation that was cited as 71.4% at issuance. While the loan does mature this year in April, the sponsor has a considerable cost basis, following a $29.4 million gut renovation in 2014 and $17.6 million of fresh equity contributed at issuance, highly incentivizing the borrower to protect its position during refinance discussions.

The transaction benefits from three loans that are shadow-rated investment grade: 85 Broad Street (Prospectus ID#1; 12.5% of the current trust), Urban Union Amazon (Prospectus ID#6; 5.3% of the current trust), and 71 Fifth Ave (Prospectus ID#12; 3.5% of the current trust). With this review, DBRS Morningstar confirms that all three loans continue to exhibit characteristics consistent with the investment-grade shadow ratings.

The 85 Broad Street loan is secured by a 1.1 million-sf, Class A office property in downtown Manhattan and is sponsored by Ivanhoé Cambridge, which contributed $308.8 million of equity at closing. The property’s occupancy decreased during the past year after the former largest tenant, WeWork, downsized to 195,704 sf (17.5% of the net rentable area (NRA)) from 370,359 sf (33.1% of NRA) in April 2021, bringing occupancy down to 79.5%. According to the Q3 2021 financial reporting, the loan had an annualized net cash flow of $17.2 million (a whole loan debt service coverage ratio (DSCR) of 1.25 times (x)), below the DBRS Morningstar derived figure of $21.6 million (a whole loan DSCR of 1.57x), reflecting a 16.5% decline. According to the seventh lease amendment, the tenant was required to deposit $5.0 million to the borrower, equating to 12 months of prepaid rent for January through December 2021, and another $3.9 million stemming from a guaranty, which was to be deposited into the rollover reserve. While the tenant’s downsizing has undoubtedly had an impact on the property’s cash flow, re-leasing the space should be feasible given the property’s location bolstered by reserves collected as a result of the WeWork termination. As of March 2021, the property had an average rental rate of $47 psf and vacancy of 21.5% (including WeWork before it downsized), compared with properties within a one-mile radius, which reported an average rental rate and vacancy of $53 psf and 11.8%, respectively. The loan also benefits from strong sponsorship, which has contributed significant equity to the deal.

Classes 85BD-A, 85BD-B, and 85BD-C are nonpooled rake bonds backed by the nonpooled $72.0 million 85 Broad Street A-B Note. The loan's nonpooled $58.8 million B-A Note and $58.8 million B-B Note are subordinate to both the rake bonds and the $169.0 million pooled A Note.

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 and X-B are 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 – 85 Broad Street - Pooled (12.5% of the pool)
-- Prospectus ID#2 – 245 Park Avenue (11.1% of the pool)
-- Prospectus ID#5 – Hotel Eastlund (5.5% of the pool)
-- Prospectus ID#17 – Hilton Garden Inn – Fort Washington (2.2% 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 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.

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 [email protected].

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