DBRS Morningstar Confirms Ratings on All Classes of CSAIL 2017-CX10 Commercial Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2017-CX10 issued by CSAIL 2017-CX10 Commercial Mortgage Trust:

-- Class STN-A at AA (low) (sf)
-- Class STN-X at A (sf)
-- Class STN-B at A (low) (sf)
-- Class V1-STNA at A (low) (sf)
-- Class STN-C at BBB (low) (sf)
-- Class V1-STNC at BBB (low) (sf)
-- Class V2-STN at BBB (low) (sf)

All trends are Stable.

The rating actions reflect the substantial improvement of collateral performance since the last rating action in August 2022, including growth in net cash flow (NCF) and revenue per available room (RevPAR), and a potential loan reinstatement following an extended period of delinquency, with the last payment having been received in April 2020. As of YE2022, the servicer reported NCF and RevPAR figures of $22.5 million and $378, respectively, exceeding both pre-pandemic YE2019 figures of $6.6 million and $231, respectively, and historical reporting dating back to securitization. In its analysis for this review, DBRS Morningstar performed a stressed cash flow scenario as outlined below, which implied higher ratings than those assigned based on the LTV Sizing Benchmarks; however, given the hotel’s historically volatile operating trends, the delinquent status of the loan and the outstanding advances of approximately $8.5 million with the June 2023 reporting, DBRS Morningstar considered these variances warranted given uncertainty surrounding the sustainability of the cash flow growth.

DBRS Morningstar rates the rake bond that is tied to the Standard High Line NYC Loan-Specific Certificates, backed by the Standard High Line NYC loan. The interest-only, fixed-rate loan is secured by the borrower’s fee-simple interest in The Standard, High Line NYC hotel, a high-end, 338-key boutique hotel in the Meatpacking District of Manhattan. The single mortgage loan is evidenced by four separate promissory notes with a principal balance of $170.0 million, including an A-A note totaling $45.0 million, a subordinated A-B note totaling $58.4 million, a B-A note with a principal balance of $36.6 million, and a B-B note with a principal balance of $30.0 million. The A-A note is included in the trust and serves as collateral for the pooled certificates. The $58.4 million subordinated A-B note serves as collateral for the rake bond that DBRS Morningstar rates. The B-A and B-B notes are not included in the trust. The total financing, along with the borrower’s equity contribution of $172.6 million, facilitated the acquisition of the hotel for a purchase price of $340.0 million.

Despite its high quality, amenities, and location, the hotel’s NCF began declining substantially soon after securitization because of steadily declining room revenues compounded by large declines in food and beverage revenues. In June 2020, the loan transferred to special servicing because of payment default, just three months after The Standard, High Line hotel closed due to the New York shutdown stemming from the pandemic, and is currently delinquent. The property remained closed through September 2020, and performance struggled to return to pre-pandemic levels until the YE2022 servicer reported financials when NCF was $22.5 million, an increase of 240.0% from the pre-pandemic YE2019 NCF of $6.6 million and an increase of 57.3% over the Issuer’s underwritten NCF of $14.3 million. According to the June 2023 reporting, current principal and interest outstanding for the trust was approximately $8.0 million with additional outstanding advances in excess of $456,000, and the special servicer noted that a potential reinstatement of the loan was under discussion. After several months of reporting that the special servicer was proceeding with the exercise of remedies, news articles suggest the foreclosure suit was dropped in late June 2023.

The drastic improvements in performance are demonstrated by the YE2022 RevPAR figure of $378, an increase over the YE2021 RevPAR of $231 and the pre-pandemic YE2019 RevPAR of $340. RevPAR has steadily increased to $389 as of the trailing 12-month period (T-12) ended March 31, 2023. And, despite the loan’s special servicing status and delinquent payments, the hotel, which is known for its entertainment and night life, recently hosted seasonal pop-up entertainment, including a Winter 2022 bumper car experience and a Spring 2023 1960s-themed roller rink as well as major events, including The Sarabande Foundation’s benefit dinner and the celebrity-attended NYC Pride Kick-Off at the hotel’s Boom Boom Room.

The June 2022 appraisal obtained by the special servicer valued the collateral at $244.0 million, relatively in line with the August 2021 appraisal value of $245.7 million and the September 2020 appraisal value of $241.0 million, but significantly lower than the issuance value of $340.0 million.

In determining the ratings, DBRS Morningstar analyzed the cash flow under both a base-case and stressed scenario. The base-case scenario, which is based on a standard surveillance haircut to the YE2022 reported figure, results in a base-case DBRS Morningstar value of $294.0 million, compared with the DBRS Morningstar value of $159.6 million previously derived in 2020, which applied a 5.0% discount to the issuance appraiser’s estimated land value of $168.0 million with consideration for previous performance declines. Under the stressed scenario, which was based on a 30% stress to the YE2022 NCF, DBRS Morningstar derived a stressed value of $210.4 million. The conservative haircut was used to account for the historical volatility in cash flow. In both scenarios, DBRS Morningstar applied a cap rate of 7.5%, which is at the middle of the range of DBRS Morningstar cap rate ranges for lodging properties, reflecting the hotel’s quality, amenities, and superior location. The implied DBRS Morningstar loan-to-value ratio (LTV) for the stressed scenario is 49.1% for the trust debt and 80.8% for the whole-loan balance. While the property has demonstrated significant growth over the past year, DBRS Morningstar remains cautious regarding the long-term sustainability of such growth as well as the ultimate workout strategy after a prolonged period in special servicing, which has led to a high amount of outstanding advances.

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/416784 (July 4, 2023).

Class STN-X is an interest-only (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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), which can be found on https://www.dbrsmorningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

DBRS Morningstar’s ratings had variances that were higher than the results implied by the LTV Sizing Benchmarks. As noted above, these variances are warranted because of the uncertainty surrounding the sustainability of the cash flow growth given the collateral’s historically volatile operating trends, the delinquent status of the loan, and the outstanding advances.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)
Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)
DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)
North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)
Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)
Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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