DBRS Morningstar Confirms Ratings on All Classes of BANK 2017-BNK5

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-BNK5 issued by BANK 2017-BNK5 as follows:

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

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last rating action. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the pool’s weighted-average (WA) debt service coverage ratio (DSCR) that was well above 2.25 times (x), based on the YE2022 financial reporting. The transaction also benefits from five years of amortization since issuance, as well as some defeasance, loan repayments, and four loans that are shadow-rated investment grade, as further described below.

As of the August 2023 reporting, 79 of the original 87 loans remain in the pool with an aggregate principal balance of $1.1 billion, representing collateral reduction of 13.1% since issuance. Four loans, representing 1.6% of the pool, have been fully defeased. No loans are delinquent or in special servicing, but 13 loans, representing 21.8% of the pool, are on the servicer’s watchlist. However, the two largest loans on the watchlist, Starwood Capital Group Hotel Portfolio (Prospectus ID#4; 6.8% of the pool) and Gateway Net lease Portfolio (Prospectus ID#9; 4.2% of the pool), are being monitored for deferred maintenance and/or life safety issues that DBRS Morningstar does not deem material to the loans’ credit profile.

The pool is concentrated by property type with loans secured by retail, office, and lodging properties representing 41.5%, 15.7%, and 12.8% of the pool balance, respectively. Although the office sector continues to face challenges, given the low investor appetite for the property type and high vacancy rates in many submarkets, five of the six loans
secured by office properties in this transaction continue to perform as expected, with generally improved credit metrics, either long-term or granular tenancy, and 2027 loan maturities.

The office loan that is showing increased credit risk, Capital Bank Plaza (Prospectus ID#15; 2.0% of the pool), is secured by a 148,142 square foot (sf), 15-story, Class A office tower in the central business district of Raleigh, North Carolina. The loan is currently being monitored on the servicer’s watchlist for a decline in occupancy and a low DSCR, resulting from the departure of the two largest former tenants. Capital Bank, previously occupying 44.1% of the net rentable area (NRA), was acquired by First Horizon National Corporation in 2017, and upon lease expiration in March 2021, the tenant vacated the property, moving its consolidated operations to abuilding a few blocks away. Shortly thereafter, in June 2022, Clark Nexsen (previously occupying 19.9% of the NRA) vacated the property upon its lease expiration, moving its operations to a building in the Smoky Hollow development in the Glenwood South submarket.

Per the March 2023 rent roll, the property was 32.8% occupied, with leases representing 12.2% of the NRA scheduled to expire within the next 12 months. According to the financial reporting for the trailing three months ended March 31, 2023, the property generated annualized net cash flow (NCF) of just over $0.4 million (reflecting a DSCR of 0.29x). Although cash flow has shown improvement since YE2022 when NCF was reported at -$0.2 million (a DSCR of -0.12x), it is still well below the issuance figure of $2.1 million (a DSCR of 1.48x). The servicer noted that the implementation of cash management was waived until the earlier of January 1, 2024, or the until the property begins to cash flow again without re-tenanting the spaces formally occupied by Capital Bank and Clark Nexsen.

As of the August 2023 reporting, the reserve accounts had a total balance of nearly $1.0 million. In addition, the servicer noted that the borrower has provided a $2.5 million letter of credit to facilitate the cash sweep waiver. No updated appraisal has been provided since issuance when the property was valued at $32.0 million; however, given the low occupancy rate, depressed cash flow, and the general challenges for office properties in today’s environment, DBRS Morningstar notes that the collateral’s as-is value has likely declined significantly. As such, DBRS Morningstar applied a stressed loan-to-value ratio and increased the probability of default (POD) assumption in its analysis for the loan, resulting in a WA expected loss (EL) that is more than four times the pool average.

The largest loan on the servicer’s watchlist, Starwood Capital Group Hotel Portfolio, is secured by 65 hotels totaling 6,366 keys, spread across 21 states. The majority of the rooms (59.0%) are limited service while 35.0% are extended stay and the remaining 6.0% are full service. The portfolio is granular with no property representing more than 2.6% of the allocated loan balance. The loan was originally added to the servicer’s watchlist in July 2020 when the underlying collateral saw contractions in operating performance, caused primarily by pandemic-related travel restrictions. Forbearance was granted in the form of deferment of non-tax, non-insurance, and non-ground rent reserves for a period of three months to allow for those amounts to be applied to the monthly debt service obligations. Repayment of the deferred amounts was carried out over a 12-month period that began in February 2021. The loan has remained current since the modification request was granted. Although the loan is no longer being monitored on the servicer’s watchlist for performance-related declines, the servicer did note potential life safety issues at multiple properties across the portfolio, resulting in the loan remaining on the watchlist.

Operating performance has improved from the lows reported during the pandemic with the portfolio reporting YE2022 occupancy rate, NCF, and DSCR metrics of 72.7%, $44.5 million, and 1.70x, respectively, which compare favorably with the prior year’s figures of 66.1%, $36.3 million, and 1.40x. In addition, the portfolio’s average daily rate and revenue per available room are nearing stabilization with the YE2022 figures of $117 and $82 approaching the issuance figures (for the trailing 12 months ended March 31, 2017) of $119 and $89. Despite these improvements, NCF remains approximately 38.0% below the issuance figure $71.3 million. Franchise agreements for 33 hotels, representing 40.2% of the allocated loan balance, are scheduled to expire prior to loan expiration; however, the sponsor, Starwood Capital Group, will reportedly begin renegotiating the franchise renewals two years prior to expiration and will assess the profitability of each expiring agreement to determine if each property is appropriately flagged. DBRS Morningstar analyzed this loan with a stressed POD penalty, resulting in an EL nearly triple the pool average.

At issuance, four loans, representing 18.2% of the pool balance, were shadow-rated investment grade. With this review, DBRS Morningstar confirmed that the performance of those loans—Del Amo Fashion Center (Prospectus ID#1; 8.4% of the pool), Olympic Tower (Prospectus ID#5; 5.2% of the pool), Gateway Net Lease Portfolio and Stor-It Southern California Portfolio (Prospectus ID#11; 3.1% of the pool)—remains consistent with investment-grade characteristics. This assessment continues to be supported by the loan’s strong credit metrics, experienced sponsorship, and the underlying collateral’s historically stable performance.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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 (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].