DBRS Morningstar Changes Trends on 10 Classes of CD 2017-CD4 Mortgage Trust to Negative From Stable, Confirms Ratings on All Classes

DBRS Limited (DBRS Morningstar) confirmed the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CD4 issued by CD 2017-CD4 Mortgage Trust as follows:

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

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

The trend changes reflect DBRS Morningstar’s increased concerns for the pool, primarily related to the high concentration of loans secured by office properties, two of which are specially serviced. While select office loans in the transaction continue to perform as expected, several others are exhibiting increased credit risk with recent, or upcoming tenant roll-over, exposure to softening office submarket fundamentals, and/or sustained performance declines. During the prior credit rating action in November 2022, DBRS Morningstar downgraded the three lowest-rated classes most exposed to loss, along with the applicable notional and exchangeable classes as a result of those increased risks, which contributed to an elevated expected loss (EL) for the pool as whole. Since that time, those risks have solidified and, in some cases, increased further. With this review, DBRS Morningstar’s Commercial Mortgage-Backed Securities (CMBS) Insight Model results suggest downward ratings pressure on the four lowest-rated classes most exposed to loss, and as such, the Negative trends are warranted.

Excluding collateral that has been defeased, the pool is concentrated by property type, with loans secured by office properties representing 35.8% of the pool balance. The pool’s office concentration is primarily represented by collateral located in suburban markets. Loans with those characteristics often contribute to larger expected losses in the CMBS Insight Model, and, as a result, the subject transaction generally carries a higher pool-level EL. This concentration has become more pivotal as office sector performance has deteriorated following the onset of the Coronavirus Disease (COVID-19) pandemic; with shifts in workplace dynamics and end-user demand contributing to elevated vacancy rates in many submarkets. While three of the office loans in the subject transaction continue to exhibit healthy performance metrics, DBRS Morningstar identified nine loans secured by office collateral, representing 27.3% of the pool, that have demonstrated performance declines, or are otherwise exhibiting increased risks from issuance. In its analysis for this review, those loans were analyzed with stressed scenarios to increase the probability of default (POD) and/or increase the loan-to-value (LTV) ratios, as applicable, resulting in a weighted-average (WA) EL that was approximately 2.0 times (x) the pool average.

The largest of those loans, The Los Angeles Corporate Centre (Prospectus ID#4, 7.5% of the pool), is secured by four individual office properties located approximately five miles southeast of the Los Angeles central business district (CBD). Prior to March 2023, the portfolio was performing well with a YE2022 occupancy rate and NCF of 85.0% and $6.7 million (a DSCR of 1.82x), respectively; higher than the figures reported over the previous two years. However, the largest tenant, State Compensation Insurance Fund (21.0% of the net rentable area (NRA)), vacated after its lease expired in March 2023, pushing the occupancy rate down to 63.0%. The loan is currently being monitored on the servicer’s watchlist for an active lockbox.

The loan was structured with a cash flow sweep, that began trapping excess cash 12 months prior to the expiration of State Compensation Insurance Fund, capped at $20.00 per square foot (psf). As of the October 2023 reporting, there was $1.7 million being held across three reserve accounts. In addition, two large tenant leases totaling approximately 13.1% of NRA are set to expire within the next 12 months, including Department of Social Sciences (8.7% of NRA; lease expiration in September 2024) and Southwest Regional Council of Carpenters (4.4% of NRA; lease expiration in December 2023), which could bring occupancy to less than 50.0%. According to Reis, office properties located in the West San Gabriel Valley submarket reported a Q2 2023 average vacancy rate of 16.6% with an average asking rental rate of $29.30 psf, compared with the subject’s average rental rate of $35.70 psf. Given the drastic decline in occupancy and upcoming tenant roll-over, DBRS Morningstar expects cash flow to contract with the subsequent reporting periods. As a result, DBRS Morningstar analyzed this loan with a stressed LTV ratio and POD assumption, resulting in an EL that was roughly double the pool WA figure.

As of the October 2023 reporting, 45 of the original 47 loans remained in the pool with an aggregate principal balance of $736.8 million, representing collateral reduction of 18.2% since issuance, as a result of scheduled loan amortization, loan repayment, and the liquidation of one loan. Six loans, representing 7.8% of the pool, have been fully defeased. There are three loans, representing 7.2% of the pool, in special servicing, and 13 loans, representing 35.2% of the pool, on the servicer’s watchlist. To date, one loan has been liquidated from the trust with realized loss totaling $6.3 million, which was contained to the nonrated Class G certificate.

The largest specially serviced loan, Key Center Cleveland (Prospectus ID#7, 3.7% of the pool) is secured by a 2.1 million square foot (sf), mixed-use property in Cleveland. The property consists of a 400-key hotel, two Class A office buildings, and an underground parking garage. The loan transferred to special servicing at the borrower’s request in November 2020 because of imminent default as a result of the pandemic. The loan has remained current as of the October 2023 remittance; although, the borrower has requested a payment deferral to help fund capital expenditures, which is likely tied to a franchise agreement that was signed with Marriott and aimed at aligning the hotel with brand standards. The servicer noted that negotiations remain ongoing between the borrower and mezzanine lender.

While financial performance experienced volatility through the pandemic, the loans DSCR has historically remained above breakeven, most recently reported at 1.04x and 1.34x as of March 2023 and YE2022, respectively. As of July 2023, the hotel portion of the subject reported a trailing-12-month revenue per available room figure of $123.0, exhibiting a healthy recovery from the lows of the pandemic and exceeding the issuance figure of $108.0. In addition, the office portion of the collateral reported an occupancy rate of 90.1%, a notable improvement from the May 2023 figure of 79.8%. The increase in occupancy was primarily driven by a new 164,828 sf long-term lease (representing 7.8% of the NRA) with Benesch, Friedlander, Coplan & Aronoff LLP (Benesch). Benesch took occupancy in August 2023 and is currently within a 12-month rent free period that ends in August 2024, at which time the tenant will pay a starting base rental rate of $30.75 psf. While tenant rollover is moderate during the next 12 months, KeyBank (31.8% of the NRA, lease expiring in June 2030), retains two options to further downsize their footprint by 103,000 sf (4.9% of the NRA), following their 44,000 sf (3.2% of NRA) in July 2020. 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 $20.40 psf and average effective rental rate of $15.80 psf, compared with the subject’s average rental rate of $30.40 psf. Although there has been positive leasing momentum at the property, submarket fundamentals remain soft and the loan has spent an extended period of time with the special servicer. As such, DBRS Morningstar analyzed this loan with a stressed LTV ratio, resulting in an EL that was double the pool average.

The second largest loan in special servicing, Hamilton Crossing (Prospectus ID#12, 2.4% of the pool), is secured by a six-building, Class A office complex in Carmel, Indiana, approximately 15 miles north of the Indianapolis CBD. The loan was placed on the servicer’s watchlist in February 2019 after the largest former tenant, ADESA (30.1% of NRA; lease expiration in July 2019) did not exercise its lease renewal 12 months prior to expiration and subsequently vacated. As a result, cash management and a cash sweep were initiated and the loan subsequently transferred to the special servicer in June 2019 for imminent monetary default. Loan payments have been made late but generally less than 30 days late since the loan’s transfer and, as of the October 2023 remittance, the loan remains current.

Per the July 2023 rent roll, the portfolio was 69.2% occupied, with leases totaling approximately 17.0% of NRA set to roll within the next 12 months. According to the YE2022 financial reporting, the property generated NCF of $4.2 million (a DSCR of 1.21x), an increase from the YE2021 figure of $3.4 million (a DSCR of 0.97x), but well below the issuance figure of $5.9 million. Based on Reis data, the North/Carmel submarket reported a Q2 2023 vacancy rate of 18.7% with an average asking rental rate of $21.90 psf, compared with the subject’s in-place rate of $20.40 psf. Given the submarket’s soft fundamentals and the elevated vacancy rate at the property, DBRS Morningstar derived a stressed value based on the property’s in-place cash flow, using the high end of DBRS Morningstar’s capitalization rate range for office properties, resulting in an LTV ratio assumption of more than 100.0%, resulting in an EL that was more than double the pool average.

One loan, Hilton Hawaiian Village Waikiki Beach Resort (Prospectus ID#5; 7.7% of the pool), is shadow-rated investment grade by DBRS Morningstar. Considering the loan’s strong credit metrics, strong sponsorship strength, and historically stable performance of the underlying collateral, DBRS Morningstar confirms that the characteristics of the loan remain consistent with the investment-grade shadow rating.

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 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.

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 version 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)

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].