DBRS Morningstar Downgrades 11 Classes of Citigroup Commercial Mortgage Trust 2017-P8, Changes Trends to Negative from Stable

DBRS, Inc. (DBRS Morningstar) downgraded its credit ratings on the following Commercial Mortgage Pass-Through Certificates, Series 2017-P8 issued by Citigroup Commercial Mortgage Trust 2017-P8:

-- Class C to A (low) (sf) from A (high) (sf)
-- Class V-2C to A (low) (sf) from A (high) (sf)
-- Class V-3AC to A (low) (sf) from A (high) (sf)
-- Class X-D to BBB (low) (sf) from BBB (high) (sf)
-- Class D to BB (high) (sf) from BBB (sf)
-- Class V-2D to BB (high) (sf) from BBB (sf)
-- Class V-3D to BB (high) (sf) from BBB (sf)
-- Class X-E to BB (sf) from BBB (low) (sf)
-- Class E to BB (low) (sf) from BB (high) (sf)
-- Class X-F to B (high) (sf) from BB (sf)
-- Class F to B (sf) from BB (low) (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the following classes:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class V-2A at AAA (sf)
-- Class B at AAA (sf)
-- Class V-2B at AAA (sf)

DBRS Morningstar also changed the trends on Classes A-S, X-A, V2A, X-B, B, V-2B, C, V-2C, V-3AC, D, X-D, V-2D, and V-3D to Negative from Stable and maintained the Negative trends on Classes X-E, E, X-F, and F. The trends on all remaining classes are Stable.

The credit rating downgrades and Negative trends reflect DBRS Morningstar’s concern surrounding the increased credit risk related to the pool’s exposure to office properties, which represents 33.5% of the current pool balance, as well as the declining performance metrics for several other loans in the pool. The credit rating confirmations and Stable trends reflect the generally stable performance for the remaining loans in the pool since issuance, with no losses.

In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. While select office loans in the transaction continue to perform as expected, DBRS Morningstar identified six loans backed by office properties, representing 17.7% of the pool, showing performance declines from issuance or otherwise exhibiting increased risks from issuance that were analyzed with stressed scenarios, including increased probability of default (POD) penalties and/or increased loan-to-value (LTV) ratios, as applicable, to increase the expected losses. The resulting weighted-average (WA) expected loss for the six loans secured by office properties that were adjusted was over double the pool WA figure.

At the last credit rating action in November 2022, DBRS Morningstar maintained Negative trends for Classes E, X-E, F, and X-F because of the increased risk for several loans on the servicer’s watchlist and persisted material deviations suggesting downward ratings pressure from the CMBS Insight Model for Classes B, V-2B, C, V-2C, and V-3AC because of the associated uncertain loan-level event risk. DBRS Morningstar’s current outlook for several office loans in the pool that have sustained performance declines combined with challenges stemming from other loans with declining performance metrics has resulted in further downward ratings pressure implied by the CMBS Insight Model results for the four lowest-rated classes along with their applicable classes that reference them, that are most exposed to loss, warranting the downgrades and Negative trends.

As of the September 2023 remittance, 52 of the original 53 loans remain in the trust with an outstanding trust balance of $1.04 billion, reflecting a collateral reduction of 4.6% since issuance. Seven loans, representing 9.2% of the trust balance, are defeased. There are 11 loans, representing 28.1% of the trust balance, on the servicer’s watchlist, primarily because of low debt service coverage ratios (DSCRs), declining occupancy rates, and/or tenant rollover risk, including the largest loan in the pool. Of the loans on the servicer’s watchlist, there are three loans backed by office properties and one loan backed by a hotel property, representing 17.6% of the pool balance, in the top 10.

In addition to the loans on the servicer’s watchlist, DBRS Morningstar’s analysis reflects increased credit risk for two loans in the top 10—Corporate Woods Portfolio (Prospectus ID#4, 4.3% of the pool), a 2.0 million-square-foot (sf) office and retail space located in suburban Kansas City with declining occupancy, and Mall of Louisiana (Prospectus ID#6, 4.3% of the pool), a regional mall in a noncore market with a vacant noncollateral anchor space, declining net cash flow, and moderate exposure to near-term tenant rollover—since the last credit rating action in November 2022. These loans were analyzed with additional stresses to increase the expected losses resulting in losses that are more than double the pool WA expected loss.

Bank of America Plaza (Prospectus ID#5, 4.2% of the pool), the second largest loan on the servicer’s watchlist, is secured by a 438,996-sf Class A office property located in Troy, Michigan, approximately 20.0 miles northwest of the Detroit central business district. The loan is on the servicer’s watchlist because of the departure of Bank of America, previously occupying 35.2% of net rentable area (NRA), vacating upon lease expiration in January 2023. While occupancy has declined to 53% as of June 2023 from 91% at YE2022, the resulting DSCR of 1.53 times (x), down from 2.81x at YE2022, remains relatively healthy and the remaining tenant roster is stable with long-term leases in place and minimal near-term rollover prior to loan maturity. The loan also benefits from a healthy reserve with a reported September 2023 balance of $7.6 million. In its analysis for this review, DBRS Morningstar applied a POD penalty and assumed a stressed LTV ratio to reflect the increased credit risk ahead of the loan’s upcoming maturity in September 2024, resulting in an expected loss that was more than double the pool WA expected loss.

The largest loan on the servicer’s watchlist, 225 & 233 Park Avenue South (Prospectus ID#1, 5.8% of the pool), is secured by a 675,756-sf Class A office property with ground-level retain in the Gramercy Park submarket of Manhattan. As of the most recent financial reporting in March 2023, the property reported an occupancy and DSCR of 99% and 3.90x, respectively. However, the top three tenants, Meta (39.4% of NRA, expiring in October 2027), Buzzfeed (28.7% of NRA, expiring in May 2026), and STV Incorporated (19.7% of NRA, expiring in May 2024), which account for more than 90% of NRA have confirmed that they have vacated or will be vacating in 2024 at or before their respective scheduled lease expiration date. While a significant portion of the building has exposure to tenant rollover risk, mitigating factors include structural features, including a low going-in LTV ratio of 31.3%, leasing reserves totaling $30.0 million, and cash management provisions.

DBRS Morningstar expects that the impact to cash flow will be somewhat insulated by Meta’s $33 million termination fee, Buzzfeed subleasing its space, and the upside potential given STV Incorporated’s below market lease of $52 per sf (psf) as of the June 2022 rent roll compared with the Class A average submarket asking rent of $96 psf. While the property has historically benefited from its strong location and high quality finishes, many corporate tenants have been moving operations to more desirable areas within Manhattan in recent months. Colliers International Q2 2023 Manhattan Office Market Overview report shows that the property’s Gramercy Park submarket has softened with the submarket availability rate increasing to 19.1%, an increase of more than 200 basis points quarter-over-quarter and 300 basis points year-over-year, increasing at a quicker pace than the broader Midtown South market of Manhattan. At issuance, DBRS Morningstar shadow rated the 225 & 233 Park Avenue South loan as investment grade because of the property’s quality and location. Given the increased credit risk combined with the softening of the submarket, in its analysis for this review DBRS Morningstar removed the shadow rating for this loan with this review.

At issuance, DBRS Morningstar also shadow rated General Motors Building (Prospectus ID#2, 5.3% of the pool), The Grove at Shrewsbury (Prospectus ID# 7, 4.2% of the pool), and Lakeside Shopping Center (Prospectus ID #13, 3.2% of the pool) investment grade. With this review, DBRS Morningstar confirms that the performance of these loans remains consistent with investment-grade loan characteristics.

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, X-D, X-E, and X-F 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 credit ratings assigned to Classes A-S, V-2A, B, and V-2B materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit ratings stress implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviation is uncertain loan-level event risk. The analysis for this review included stressed scenarios for several office loans given the general challenges faced in that sector. The results of that analysis suggested downward pressure through the middle of the bond stack following the credit ratings downgrades, most pronounced for Classes A-S and B, along with their applicable exchangeable Classes V-2A and V-2B; however, given the most challenged loans, would likely be transferred to special servicing and possibly liquidated, DBRS Morningstar believes the increased risks are most concentrated in the lowest-rated classes, supporting the Negative trends assigned with this review continuing to display downward pressure.

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.

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.

DBRS, Inc.
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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 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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)

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