Morningstar DBRS Confirms Credit Ratings on All Classes of HFX Funding 2017-1

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the notes issued by HFX Funding 2017-1 as follows:

-- Class A-3 Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which benefits from a sizable first-loss piece in the unrated Class E note that provides significant cushion against loss for the senior notes in the capital stack. This cushion is particularly noteworthy given that one loan, representing more than 6.8% of the pool balance, is currently with the special servicer with another loan expected to transfer to special servicing in the near term. In addition, loans representing approximately 73.0% of the pool are either scheduled to mature by YE2025 or are already past their original maturity dates. In a wind-down scenario, Morningstar DBRS expects that the majority of the non-specially serviced loans will successfully repay at maturity. However, Morningstar DBRS has identified two loans, representing 25.8% of the pool balance, that exhibit increased default risk given weak credit metrics and/or upcoming rollover risk. These challenges suggest increased refinance risk upon maturity; however, the sizeable first-loss piece and lack of interest shortfalls at this time support the credit rating confirmations.

According to the August 2024 remittance, 10 of the original 18 loans remain in the pool with a total trust balance of $130.4 million, representing a collateral reduction of 52.0% from the fully funded trust balance at June 2020. No loans on the servicer's watchlist and only one loan, representing more than 6.8% of the pool balance, is in special servicing,. At the last review, Morningstar DBRS had noted its concern about the Ajax Aspen 410 East Hyman loan, which was previously in special servicing because the borrower had pledged the property as collateral for another loan. With the August 2024 remittance, the loan successfully repaid, incurring no loss to the trust. The pool is most concentrated by loans secured by multifamily, retail, and office properties representing 36.7%, 26.9%, and 25.5% of the pool balance, respectively. Morningstar DBRS has a cautious outlook on the office asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords' efforts to backfill vacant space, and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered.

The Storrs Center Phase II loan (Prospectus ID#1; 6.8% of the current trust balance) is secured by an unanchored retail property in Storrs, Connecticut, catering to students of the University of Connecticut. The loan transferred to special servicing in September 2020, and the title was ultimately transferred to the trust in February 2021. The property manager continues to lease up the property for an eventual sale. According to the Q1 2024 performance summary report, the subject was 67.7% occupied compared with 47.9% occupied at YE2022; however, tenants representing approximately 17.1% of the net rentable area (NRA) have leases expiring by YE2025. The largest tenants at the subject include Huskies Tavern (14.5% of the NRA, lease expiry in June 2033), NICABM (9.0% of the NRA, lease expiry in March 2026), and Blaze Pizza (7.8% of the NRA, lease expiry in September 2031). The subject was appraised in November 2023 and valued at $8.7 million, a decline from the April 2021 appraisal value of $12.5 million and the issuance value of $13.8 million. Morningstar DBRS liquidated this loan in its analysis with a stressed haircut to the November 2023 value, resulting in a loss of $5.6 million.

The largest loan in the pool, 365 West Passaic Street (Prospectus ID#11; 14.9% of the pool), is secured by a 218,493-square foot Class B office building in Rochelle Park, New Jersey. The loan is not on the servicer's watchlist or in special servicing at this time, however, it is now past due its July 2024 maturity date and Morningstar DBRS expects the loan to transfer to special servicing in the near term. According to the Q1 2024 performance summary report, the subject was 78.5% occupied, which is down from being 86% occupied at YE2023 but up from being 41.6% occupied at loan contribution. The largest tenants at the subject include CarePlus (8.1% of NRA, lease expiry in December 2033), Botwinick Company (6.1% of the NRA, lease expiry in March 2034), and Stantec Consulting Services (6.0% of the NRA, lease expiry in May 2025). There is considerable t rollover risk as tenants occupying approximately 26.0% of the NRA have upcoming lease expirations by YE2025. Based on the trailing six months ended June 30, 2024, the annualized net cash flow (NCF) was $1.7 million, in line with the YE2023 NCF and an improvement from the Morningstar DBRS NCF of $588,000. As of March 2024, the loan held $635,000 across all reserves, in addition to $1.1 million in an excess cash reserve account that was trapped as part of a cash management trigger. According to a Q2 2024 Reis report, the Hackensack submarket reported a vacancy rate of 14.8%, which has declined from the vacancy rate of 19.5% in Q2 2022. The subject was initially valued at $27.0 million, which equated to an as-is loan-to-value ratio (LTV) of 72%. Morningstar DBRS is of the opinion that, while there is no new appraisal, the value of the subject continues to be stressed considering its suburban location, soft office submarket, considerable tenant rollover risk, and the general lack of investor appetite for office properties, refinancing the loan will prove to be difficult and a transfer to special servicing is likely in the near term.

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 Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781).

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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down, with only a few loans remaining. In those cases, the Morningstar DBRS credit ratings are typically based on a recoverability analysis for the remaining loans. Additionally, 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.

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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

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 (July 17, 2023).

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