DBRS Morningstar Confirms All Ratings on BXP Trust 2017-CC

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CC issued by BXP Trust 2017-CC:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. The 10-year fixed-rate loan is interest only (IO) for the full loan term and is secured by Colorado Center in Santa Monica, California. The whole loan of $550.0 million consists of $298.0 million of senior debt and $252.0 million of subordinate debt. The subject transaction represents $98.0 million of the senior debt and the entire subordinate debt amount. The collateral is an office park consisting of six Class A buildings totalling 1.2 million square feet (sf) and a three-level underground parking garage. The property is approximately 1.5 miles northeast of downtown Santa Monica, in the heart of the city’s media and entertainment area.

The property’s occupancy declined to 80.0% following the departure of Home Box Office (HBO; 11.3% of the net rentable area (NRA)), at HBO’s March 2021 lease expiry, from 97.8% at YE2020 and 90.9% at issuance. The servicer confirmed that the largest tenant, Hulu LLC (Hulu), has expanded into a portion of HBO’s space, bringing Hulu’s total footprint to 350,933 sf (29.5% of the NRA), an increase from its original footprint of 261,823 sf, and extended its lease to February 2029. Servicer commentary indicates that Hulu has a six-month rent abatement period that burns off in June 2022, so the updated lease terms were not reflected in the September 2021 rent roll. Accounting for this expansion, property occupancy had improved to 87.4% as of December 2021.

Other large tenants at the property include Edmunds.com Inc. (Edmunds; 16.6% of NRA, lease expires in January 2028), and Rubin Postaer and Associates (16.6% of NRA, lease expires in June 2033). According to an online posting located by DBRS Morningstar, 128,486 sf (10.8% of NRA) of Edmund’s space was listed as available for sublease. The subject serves as Edmunds’ corporate headquarters, but the posting suggests that the tenant is not fully using its space and may intend to downsize or vacate. Per the terms of its lease, Edmunds must notify and obtain approval from the servicer prior to subleasing its space.

According to the February 2022 loan-level reserve report, there is $5.3 million held in tenant reserves. For office properties in the Santa Monica submarket, Reis reported a Q4 2021 vacancy rate of 16.2%, which was an increase from the Q4 2020 vacancy rate of 13.8%. The sponsor, Boston Properties, Inc., had contributed equity into the property and recently made upgrades to the property’s common spaces by adding a food hall.

Based on the financials for the trailing nine months ended September 30, 2021, the loan reported a debt service coverage ratio (DSCR) of 2.57 times (x), compared with the YE2020 DSCR of 2.84x and YE2019 DSCR of 3.05x. The implied DSCR when accounting for the departure of HBO is approximately 2.50x, which is still well above the DBRS Morningstar DSCR at issuance of 2.24x. Given the commencement date of Hulu’s new lease and the abatement period, DBRS Morningstar expects some lag time until the reported effective gross income reflects new rental revenues.

ESG CONSIDERATIONS
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.

Class X-A is an IO certificate that references 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 4, 2022), 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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577