DBRS Morningstar Confirms All Ratings of Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33, Changes Trends on Four Classes

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-C33 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33 as follows:

-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)

In addition, DBRS Morningstar changed the trends on Classes X-D, D, E, and F to Negative from Stable. All other trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since last review, as exhibited by the weighted-average debt service coverage ratio (DSCR) for the pool that is above 2.0 times (x), based on the most recent year-end financials. In addition, there is a small concentration of loans on the servicer’s watchlist. However, DBRS Morningstar is concerned with the sole loan in special servicing, Key Center Cleveland (Prospectus ID#5, 6.3% of the pool), as well as the largest loan on the watchlist, D.C. Office Portfolio (Prospectus ID#8, 5.9% of the pool balance). Both loans are backed by office properties and have reported performance declines. In general, the office sector has been challenged given the increase in vacancy rates in many submarkets and the shift in office space demand. Considering the loan-specific concerns, the Negative trends on the most junior bonds are supported. Additional information on these loans is detailed below.

Per the August 2023 reporting, 42 of the original 44 loans remain in the trust, with an aggregate principal balance of $577.6 million, reflecting a collateral reduction of 17.8% since issuance. There are three loans on the servicer’s watchlist, representing 9.8% of the pool balance. These loans are primarily monitored for low DSCRs or occupancy rates.

Key Center Cleveland is secured by a 2.1 million square foot (sf), mixed-use property in Cleveland, comprising a 400-key hotel, two Class A office buildings, and an underground parking garage. The loan was transferred to special servicing at the borrower’s request in November 2020 because of imminent default as a result of the Coronavirus Disease (COVID-19) pandemic. The loan has remained current as of the August 2023 remittance, although the borrower has requested for a payment deferral to help fund capital expenditures, which is likely tied to the franchise agreement with Marriott in order to align with brand standards. The discussions are currently ongoing between the borrower and mezzanine lender. The year-end (YE) 2022 financials reported a net cash flow (NCF) of $21.3 million (reflecting a DSCR of 1.34x), a slight decrease from YE2021 at $23.5 million (a DSCR of 1.63x) and the DBRS Morningstar NCF of $25.3 million. Per the May 2023 STR report, the hotel portion of the subject reported trailing-twelve-month (T-12) occupancy rate, average daily rate (ADR) and revenue per available room (RevPAR) figures of 66.7%, $185 and $123, respectively. All three metrics exhibited a healthy recovery from pandemic lows with the T-12 May 2023 RevPar exceeding the issuance figure of $108.

According to the May 2023 rent roll, the office portion of the collateral was 79.8% occupied, a notable decline from the October 2021 figure of 88.7% and issuance of 92.9%. The largest tenant, KeyBank (31.8% of the net rentable area (NRA), lease expiring in June 2030), downsized by 44,000 sf (3.2% of the NRA) in July 2020 after providing the required 12-month notice and paying a $2.1 million fee. Although KeyBank’s lease has a three-year lockout period before the tenant can contract its footprint further, the tenant has two options remaining to further downsize a total of 103,000 sf. Rollover risk is rather limited in the next 12 months with tenants representing less than 5.0% of NRA scheduled to roll. In addition, four new leases were recently signed, totaling 13.8% of NRA and are expected to take occupancy in 2023, which would increase occupancy levels to approximately 94.0%. According to Reis, office properties located in the Downtown submarket reported a Q2 2023 average vacancy rate of 20.1%, average asking rental rate of $20.4 per square foot (psf) and average effective rental rate of $15.8 psf, compared with the subject’s average rental rate of $30.4 psf. Given the loan’s prolonged stay with the special servicer since 2020 and performance continues to be below DBRS Morningstar expectations, DBRS Morningstar maintained a stressed probability of default (PoD) in its analysis for this review. The resulting expected loss was more than double the pool average.

The largest loan on the servicer’s watchlist, D.C. Office Portfolio, is secured by three Class B office buildings in Washington, D.C. The loan is being monitored for a low DSCR with the YE2022 figure at 0.92x. Occupancy has dropped from the issuance level of 87.8% to 70.8% as per the March 2023 rent roll with an average rental rate of $44.9 psf. According to Reis, the Q2 2023 average asking rental rate and vacancy figures within a one-mile radius of the subject were reported at $56.7 psf and 18.0%, respectively, while the Downtown submarket reported figures of $55.2 psf and 16.1%, respectively. Servicer commentary indicated leasing activity remained slow and marketing efforts were relatively unsuccessful. Given the current climate for the office sector in the midst of shifts in workplace dynamics and higher interest rates, DBRS Morningstar remains cautious regarding the property type. For this review, DBRS Morningstar applied a stressed loan-to-value ratio in its analysis, resulting in an expected loss that exceeded the pool average by approximately 30.0%.

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).

Classes X-A, X-B, and X-D are interest-only (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 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.

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 credit ratings are monitored.

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

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 (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].