DBRS Morningstar Confirms Ratings on All Classes of HFX Funding 2017-1

DBRS Limited (DBRS Morningstar) confirmed its ratings on 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 view of the transaction performance, which benefits from a sizable first loss piece in the unrated Class E Certificate that provides significant cushion against loss for the rest of the capital stack. This cushion is particularly noteworthy given two loans are currently with the special servicer in this pool, representing more than 15% of the total balance. 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 set forth by the loan documents. The deal was deemed fully funded as of June 2020, with a trust balance at that time of $246.2 million, made up of 18 loans collateralized by stabilized assets.

According to the August 2023 remittance, 15 loans remain in the pool with a total trust balance of $209.8 million, representing a collateral reduction of 22.9% from the fully funded trust balance at June 2020. There are two loans in special servicing, representing 16.2% of the pool balance.

The largest loan in the pool, Ajax Aspen 410 East Hyman (11.9% of the current trust balance), is in special servicing. The loan is secured by a 34,365-square-foot (sf) mixed-use portfolio consisting of five properties in Aspen, Colorado. The loan was transferred to the special servicer in May 2023 after it was discovered the borrower had pledged the subject property as collateral for another loan. This triggered a cash management provision, and the servicer has advised the setup is in process. As of August 2023, the servicer reports that the subject loan is 30 days to 59 days delinquent and a foreclosure is being contemplated because of the unauthorized pledge.

The collateral portfolio had a weighted-average occupancy of 82.0% as of March 2023, compared with the YE2022 occupancy rate of 96.9% and the YE2021 occupancy rate of 100%. Tenants representing approximately 54.3% of the net rentable area (NRA) are scheduled to rollover in the next 12 months. This includes both the single-tenant properties whose tenants, Ushi Restaurant and Performance Ski, have lease expirations in February 2023 and October 2023, respectively. The third building that is occupied by two tenants, Ajax Holdings and Coldwell Banker Mason Morse, also has 100% rollover risk as both tenants have lease expiry in December 2023. DBRS Morningstar received confirmation that all four tenants are in various stages of renewal, with Performance Ski notably exercising its 10-year extension option to 2033. The trailing 12-month financial report ended March 31, 2023, reported a net cash flow (NCF) of $2.6 million across the portfolio, compared with the Issuer’s underwritten NCF of $1.6 million and DBRS Morningstar’s NCF of $1.4 million. The debt service coverage ratio of the portfolio for the same period was reported at a weighted average of 2.48 times (x).

Although the performance metrics and borrower’s ability to secure a significant concentration of renewals for tenants rolling through the near term are significant positives for this loan, the delinquency and the presence of unauthorized debt are of obvious concern. As such, the loan was analyzed with a probability of default and a value stress to increase the expected loss for this review. The special servicer is in the process of determining a workout strategy and the loan will be monitored closely for developments.

The second loan with the special servicer, Storrs Center Phase II (Prospectus ID#1, 4.2% of the current trust balance) is secured by an unanchored retail property in Storrs, Connecticut, home of the University of Connecticut (UConn). The loan transferred to special servicing in September 2020, and the title was ultimately transferred to the trust in February 2021. The property manager and broker are currently working on leasing up the property in anticipation of a sale in the near term. The property caters to UConn students, and the disruptions to campus populations amid the Coronavirus Disease (COVID-19) pandemic compounded performance declines that began in 2019. As of YE2022, the economic occupancy rate was 47.9%, down from 62.5% at YE2021 and 100% at issuance. The largest tenant is Amazon Pickup Points (11.3% of the NRA), which went dark in 2019 and exercised a lease termination option available in 2023. Given the sustained performance declines, DBRS Morningstar expects the as-is value has fallen significantly; therefore, a liquidation scenario that assumed a 60% haircut to the April 2021 $12.5 million appraisal was analyzed for this review, resulting in a loss severity in excess of 60%, which would be well contained to the Class E Certificate balance of $30.4 million.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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; https://www.dbrsmorningstar.com/research/410912).

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

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 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 Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023), https://www.dbrsmorningstar.com/research/410913

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 (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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