DBRS Morningstar Confirms All Ratings of HFX Funding 2017-1

DBRS Limited (DBRS Morningstar) confirmed all ratings on all of the notes issued by HFX Funding 2017-1 as follows:

-- Class A-2 Notes at AAA (sf)
-- Class A-3 Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which benefits from a sizable unrated class that insulates the rated classes from losses. This transaction was initially structured with a post-closing funding period whereby loans could be contributed to the pool, with the final pool capped at a maximum balance of $300.0 million. Through the funding period, DBRS Morningstar analyzed newly funded loans when the pool reached funding targets of 25.0%, 50.0%, and 85.0%, to ensure the collateral met the Target Enhancements as set forth in the transaction documents. Although the initial funding period was expected to expire within six months of closing, several extensions were granted and the deal was deemed fully funded as of June 2020, with 18 loans and a trust balance of $246.2 million.

According to the May 2022 remittance, 16 loans remain in the pool with a total trust balance of $219.2 million, representing a collateral reduction of 19.5% from the fully funded trust balance at June 2020. There is one defeased loan, representing 3.1% of the pool balance, and one loan in special servicing, representing 4.1% of the pool balance.

Storrs Center Phase II (Prospectus ID#1, 4.1% of the pool) is secured by an unanchored retail property in Storrs, Connecticut, home of the University of Connecticut (UConn). The loan transferred to special servicing in May 2020, and the title was ultimately transferred to the trust in February 2021. The property caters to UConn students, and the disruptions to campus populations amid the Coronavirus Disease (COVID-19) pandemic contributed to a compounding of performance declines that began in 2019. As of December 2021, the economic occupancy rate was 62.5%, but the physical vacancy rate was approximately 51.0% as Amazon Pickup Points (11.3% of the net rentable area (NRA)) went dark in 2019. The tenant continues to pay rent, and the lease is backed by a corporate guarantee through the February 2026 lease expiry. There is significant near term rollover risk as leases representing 19.5% of the NRA expired or will be expiring in 2022. Efforts to lease-up the vacant space remain ongoing, and the collateral manager reports ongoing discussions with a few prospects. Given the sustained occupancy declines that began prior to the pandemic, DBRS Morningstar expects there has been a material value decline from the issuance figure. In the liquidation scenario for this review, DBRS Morningstar assumed a loss severity in excess of 50.0%.

The 365 West Passaic loan (Prospectus ID#11, 9.1% of the pool) is secured by a Class B office building in Rochelle Park, New Jersey, approximately 20 miles northwest of Lower Manhattan, New York. Occupancy has been depressed since the departure of the former largest tenant, Avenue Stores (26.2% of the NRA), bringing the December 2020 occupancy rate to 57.7%. However, occupancy improved to 64.6% as of December 2021 and is expected to increase to approximately 75.0% with the recently signed Arizona College of Nursing. That tenant will take 23,600 square feet (sf) of space on a lease commencing in July 2022, with a 10-year term and an initial rental rate of $32.00 per sf (psf). The loan has been cash managed since late 2020 and to date, approximately $892,000 has been swept. According to the May 2022 loan level reserve, the loan has $1.8 million held across reserves, including $540,000 in leasing reserves and $999,000 in other reserves. According to Reis, office properties in the Hackensack/Teaneck submarket reported a Q1 2022 vacancy rate of 15.8% and an average asking rental rate of $27.48 psf, compared with the Q1 2021 figures of 17.8% and $27.41 psf, respectively. The DBRS Morningstar net cash flow (NCF) derived at loan contribution represented a sizable -71.9% variance from the issuer’s NCF, which increased the probability of default (POD) in the analysis. The variance is largely a factor of a significantly higher stabilized vacancy rate assumed by DBRS Morningstar. The loan has a moderate loan-to-value ratio of 74.0% that, in conjunction with an elevated POD, resulted in an expected loss well above the deal average.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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. 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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