Press Release

Morningstar DBRS Confirms Credit Ratings on All Classes of BANK 2017-BNK7, Changes Trends on Six Classes to Negative From Stable

CMBS
July 30, 2024

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-BNK7 issued by BANK 2017-BNK7 as follows:

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

Morningstar DBRS changed the trends on Classes X-D, D, X-E, E, X-F and F to Negative from Stable. The trends on all remaining Classes are Stable.

The credit rating confirmations reflect the stable performance of the transaction as exhibited by a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.8 times (x) based on the most recent financial reporting available. However, there is a high concentration of loans collateralized by office and retail properties, which represent 34.6% and 22.9%, respectively, of the current pool balance. While select office loans in the transaction continue to perform as expected, several others, including the pool's second- and fifth-largest loans, 222 Second Street (Prospectus ID# 2; 10.1% of the pool balance) and Corporate Woods (Prospectus ID# 4; 5.7% of the pool balance), are exhibiting increased credit risk with exposure to upcoming lease roll-overs, softening office submarket fundamentals, and/or sustained performance declines. In addition, two top-10 loans, Mall of Louisiana (Prospectus ID# 6; 5.6% of the pool balance) and Overlook at King of Prussia (Prospectus ID# 9; 3.8% of the pool balance), are secured by regional malls that have experienced declines in cash flow since issuance. The Negative trends assigned to the three lowest-rated classes reflect these loan-specific challenges considering those classes are most exposed to loss if the performance of the underlying collateral continues to deteriorate. Mitigating factors include a sizable unrated first-loss piece totaling $34.6 million with no losses incurred to the trust to date. In addition, the largest loan in the pool, which is secured by an office property, is shadow-rated investment grade, as further described below.

According to the July 2024 remittance, 62 of the original 65 loans remain within the transaction with a trust balance of $1.1 billion, reflecting a collateral reduction of 10.7% since issuance. Eight loans, representing 17.0% of the pool balance, are on the servicer's watchlist. Only one loan, representing 2.3% of the pool balance, is in special servicing and one other loan, representing 1.5% of the pool balance, is fully defeased.

The 222 Second Street loan is secured by a 452,418 square foot (sf) office property in the South Financial District submarket of San Francisco. The trust debt of $110.0 million is a pari passu portion of a $291.5 million whole loan. The 26-story office tower was developed in 2015 and is currently 100.0% leased to LinkedIn. LinkedIn invested more than $60.0 million ($132.00 per square foot (psf)) to build out its space in addition to a $43.1 million ($95.00 psf) tenant improvement (TI) contribution from the sponsor. LinkedIn's 26 leases at the property are guaranteed by its parent company, Microsoft, and are scheduled to expire between December 2025 and December 2027. Although LinkedIn's leases are structured with renewal options, it is unlikely that the tenant will exercise the majority of those options considering its adoption of a flexible work policy that allows the majority of its employees to work remotely on a part-time or full-time basis. LinkedIn continues to jettison underused office space, having put approximately 115,000 sf of space (about 25.0% of net rentable area (NRA)) up for sublease, of which 63,000 sf was subleased to Silicon Valley Bank and 13,000 sf was subleased to Early Warning Services, LLC. According to CBRE, Class A office properties within the South Financial District submarket reported an average vacancy rate of 34.3% as of Q2 2024.

The loan is structured with a cash flow sweep should LinkedIn not renew within 17 months of its staggered lease expiration dates. During a cash sweep period, monthly reserves for periodic repairs and improvements are required in the amount of $0.20 psf, per annum (to be capped at two years of accumulations), in addition to monthly reserves for TIs and leasing commissions in the amount of $3.00 psf, per annum (to be capped at $50.00 psf of accumulations). The loan also benefits from a low going-in loan-to-value ratio (LTV) of 56.0% (based on the whole-loan balance and the issuance appraised value of $516.0 million) providing some cushion against value declines. Moreover, the loan has an anticipated repayment date in September 2027 with a maturity date two years later in September 2029, providing the sponsor time to backfill vacant space and work toward stabilization, if required. The property also benefits from a strong loan sponsor, Tishman Speyer, one of the world's leading real estate investment and development firms. Given the submarket's soft fundamentals and the high probability that LinkedIn will give up the majority of its space as its leases roll, Morningstar DBRS analyzed the loan with an elevated probability of default (POD) penalty and stressed LTV, resulting in an expected loss that was significantly above the base-level expected loss and relatively in line with the pool average.

The sole loan in special servicing, First Stamford Plaza (Prospectus ID#15; 2.3% of the pool), is secured by a Class A office complex in Stamford, Connecticut. The trust debt of $25.0 million is a pari passu portion of a $164.0 million whole loan securitized across three other CMBS transactions, including JPMCC 2017-JP7 and JPMDB 2017-C7, which are also rated by Morningstar DBRS. The loan had previously been monitored on the servicer's watchlist for performance declines and was 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. Occupancy has been declining since issuance with the YE2023 occupancy rate reported at 75.0%. Consequently, the loan's YE2023 DSCR was 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 leases representing approximately 17.0% of the NRA are scheduled to expire within the next 12 months. According to Reis, office properties in the Stamford submarket reported a vacancy rate of 28.8% with an average rental rate of $34.36 psf as of Q1 2024. The property was most recently appraised in February 2024 at a value of $135.9 million, a substantial decline from the 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 approaching 40.0%.

The largest loan on the servicer's watchlist, Redondo Beach Hotel Portfolio (Prospectus ID#7; 5.3% of the pool), is secured by two hotels--a 172-key Residence Inn by Marriott and an adjacent 147-key Hilton Garden Inn. The hotels are in Redondo Beach, California, approximately seven miles southeast of the Los Angeles International Airport. The hotels' performance was trending downward even prior to the pandemic and the loan continues to be monitored on the servicer's watchlist for a low DSCR, which was reported at 0.91x as of the trailing 12 months (T-12) ended March 31, 2024. The properties underwent renovations during H1 2023, which significantly affected the occupancy rate as entire floors were unavailable. In addition, an increase in insurance premiums and franchise fees has placed further downward pressure on cash flow. However, with renovations completed, operating performance is expected to improve as the borrower works toward stabilization. Occupancy rate, average daily rate, and revenue per available room (RevPAR) metrics continue to incrementally improve with the figures for the T-12 ended March 31, 2024, reported at 77.4%, $164.00, and $126.90, respectively. Although RevPAR has exceeded the YE2023 figure of $122.20, it remains below the issuance figure of $151.40. Morningstar DBRS analyzed this loan with an elevated POD penalty, resulting in an expected loss that is approximately 2.3x greater than the pool average.

At issuance, five loans, representing 24.8% of the pool balance, were shadow-rated investment grade. With this review, Morningstar DBRS confirms that the performance of four of those loans--General Motors Building (Prospectus ID#1; 10.3% of the pool), Westin Building Exchange (Prospectus ID#5; 6.2% of the pool), The Churchill (Prospectus ID#8; 4.5% of the pool), and Moffett Place B4 (Prospectus ID#13; 2.8% of the pool)--remains consistent with investment-grade loan characteristics, given the strong credit metrics, experienced sponsorship, and the underlying collateral's historically stable performance.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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 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.

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
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://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

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 (July 17, 2023).

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

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating