Morningstar DBRS Downgrades Credit Ratings on Four Classes of JPMDB Commercial Mortgage Securities Trust 2017-C7, Changes Trends on Five Classes

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-C7 issued by JPMDB Commercial Mortgage Securities Trust 2017-C7 (the Issuer) as follows:

-- Class X-D to BB (high) (sf) from BBB (sf)
-- Class D to BB (sf) from BBB (low) (sf)
-- Class E-RR to CCC (sf) from BB (low) (sf)
-- Class F-RR to C (sf) from B (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- 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 (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)

Morningstar DBRS changed the trends on Classes B, C, D, X-B, and X-D to Negative from Stable. All other trends are Stable, with the exception of Classes E-RR and F-RR, which have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

The credit rating downgrades reflect Morningstar DBRS' increased loss projections tied to the loans in special servicing. Since the last credit rating action, two loans, representing 8.2% of the pool balance, transferred to special servicing. Morningstar DBRS' analysis included a liquidation scenario for both specially serviced loans, resulting in implied losses in excess of $35.0 million that would fully erode the unrated Class G-RR certificate and a portion of the Class F-RR certificate, further reducing credit enhancement to the junior bonds. The Negative trends are reflective of Morningstar DBRS' concerns with various loans exhibiting increased credit risk, as well as the increased credit risk profile of loans backed by office properties, which is the largest property concentration, comprising 28.1% of the current pool balance. Morningstar DBRS analyzed six loans, representing 25.8% of the pool, with stressed loan-to-value ratios (LTVs) and/or elevated probability of defaults (PODs) to increase the expected loss (EL) at the loan level as applicable. The resulting weighted-average (WA) EL for these loans was over 1.5 times (x) the pool's WA figure.

The credit rating confirmations are reflective of the otherwise stable performance of the remaining loans in the pool which, based on the most recent year-end financials, reported a WA debt service coverage ratio (DSCR) of 1.97x and a WA debt yield above 10.0%. As of the June 2024 remittance, 34 of the original 41 loans remained in the trust, with an aggregate balance of $982.1 million, representing a collateral reduction of 11.1% since issuance. There are three fully defeased loans, representing 7.8% of the current pool balance. There are 11 loans on the servicer's watchlist, representing 36.6% of the pool balance, that are being monitored primarily for performance concerns, deferred maintenance items, and the occurrence of trigger events. By property type, the pool is most concentrated by loans secured by office properties (28.1% of the pool), followed by lodging (18.7% of the pool) and industrial (18.3% of the pool) properties.

The largest loan in special servicing, First Stamford Plaza (Prospectus ID#6, 5.6% of the pool), is secured by a Class A office complex in Stamford, Connecticut. The pari passu loan is securitized across five CMBS transactions, including the subject transaction as well as JPMCC 2017-JP7 and BANK 2017-BNK7, which are also rated by Morningstar DBRS. The loan had previously been monitored on the servicer's watchlist for performance declines and was recently transferred to special servicing in December 2023 for payment default. The most recent special servicer commentary notes that a receiver was appointed in May 2024, as the borrower has expressed its intention to give back the keys to the property. As a result of departing or downsizing tenants, occupancy declined to 71.0% at YE2022 from 91.0% at issuance, before increasing slightly to 75.0% at YE2023. Consequently, the loan's DSCR has similarly declined, with the YE2023 DSCR reported at 1.19x, compared with the YE2022 DSCR of 1.57x, and the Morningstar DBRS DSCR of 2.38x derived at issuance. In addition, near-term lease rollover is elevated as tenant leases representing approximately 17.0% of the net rentable area (NRA) are scheduled to expire within the next 12 months. According to Reis, as of Q1 2024, office properties in the Stamford submarket reported a vacancy rate of 28.8% with an average rental rate of $34.36 per square foot (psf). According to the February 2024 appraisal, the property reported an as-is value of $135.9 million, a substantial decline from issuance appraised value of $285.0 million. Morningstar DBRS liquidated the loan in its analysis based on a haircut to the most recent appraised value, resulting in a loss severity of approximately 40.0%.

The second-largest loan in special servicing, Preston Plaza (Prospectus ID#17, 2.6% of the pool), is secured by a 259,000-sf office property in Dallas. The loan transferred to special servicing in September 2023 for payment default and is over 121 days delinquent as of the June 2024 remittance. The most recent special servicer commentary notes that a receivership sale is expected in the second half of 2024 and the borrower has stated an unwillingness to cover shortfalls moving forward. According to the YE2023 financials, the property was 64% occupied with a YE2023 DSCR of 0.52x. The servicer confirmed that the largest tenant, Slater Matsil LLP (10.3% of NRA), vacated its space upon its lease expiration in April 2024 and the second-largest tenant, the Ayco Company (9.9% of the NRA), has vacated its space ahead of its lease expiry in December 2024. Accounting for these departures, occupancy is expected to fall well below 40%. According to Reis, as of Q1 2024, office properties in the Plano/Allen submarket reported a vacancy rate of 28.4% with an average rental rate of $30.52 psf. According to LoopNet, 72,000 sf of office space is currently being marketed for lease at an average rental rate of $26.50 psf. While an updated appraisal has not yet been made available, Morningstar DBRS believes the property value has deteriorated significantly since issuance given the building's availability, depressed performance, suburban location within a softening submarket, and the currently challenged office landscape. As such, the loan was analyzed with a liquidation scenario with a significant haircut to the issuance value, resulting in a loss severity in excess of 60.0%.

At issuance, Morningstar DBRS shadow-rated Moffett Place Building 4 (Prospectus ID#1, 6.9% of the pool), Gateway Net Lease Portfolio (Prospectus ID#8, 4.4% of the pool), and General Motors Building (Prospectus ID#10, 4.6% of the pool) as investment-grade. Morningstar DBRS confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024; https://dbrs.morningstar.com/research/427030).

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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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Tel. +1 416 593-5577

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

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)

Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592)

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance)

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

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.