Morningstar DBRS Confirms All Credit Ratings of Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2017-C33 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2017-C33 as follows:

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

Morningstar DBRS maintained the Negative trends on Classes X-D, D, E, and F. All other trends remain Stable.

The Negative trends continue to reflect Morningstar DBRS' concern with the sole loan in special servicing, Key Center Cleveland (Prospectus ID#5, 6.3% of the pool), as well as two of the three loans on the servicer's watchlist, D.C. Office Portfolio (Prospectus ID#8, 6.1% of the pool) and 141 Fifth Avenue (Prospectus ID#10, 4.5% of the pool). All three loans have experienced significant declines in performance. Both Key Center Cleveland and D.C. Office Portfolio are backed by office properties. 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 office space demand. Considering the loan-specific concerns, the Negative trends on the most junior bonds are supported. 

The credit rating confirmations reflect the otherwise stable performance of the transaction, as the majority of loans continue to perform as expected, as evidenced by the weighted-average debt service coverage ratio (DSCR) for the pool that is significantly higher than 2.0 times (x) based on the most recent financials available, when excluding the three aforementioned loans of concern. Per the August 2024 reporting, 39 of the original 44 loans remain in the trust, with an aggregate principal balance of $559.4 million, representing a collateral reduction of 20.4% since issuance. There are eight loans, representing 14.3% of the pool, that are fully defeased. As noted, there are three loans, representing 12.6% of the pool, on the servicer's watchlist.

Key Center Cleveland is secured by a 2.1 million square foot (sf), mixed-use property in Cleveland, comprising a 400-key hotel, two Class A office buildings, and an underground parking garage. The loan was transferred to special servicing at the borrower's request in November 2020 because of imminent default as a result of the coronavirus pandemic. The loan remained current as of the August 2024 remittance; although, the borrower has requested for a payment deferral to help fund capital expenditures, which is likely tied to the franchise agreement with Marriott in order to align with brand standards. The borrower also submitted another request to change the hotel management company and for a lease amendment, according to servicer commentary. Discussions are reportedly ongoing between the borrower and mezzanine lender.

Despite the transfer to special servicing, the YE2023 net cash flow (NCF) was reported at $21.2 million (a DSCR of 1.33x), in line with the YE2022 NCF of $21.3 million (a DSCR of 1.34x) and the Morningstar DBRS NCF derived at issuance of $20.4 million (a DSCR of 1.28x). Per the May 2023 STR report, the hotel portion of the subject reported trailing-12-month (T-12) occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) figures of 66.7%, $185, and $123, respectively. All three metrics exhibited a healthy recovery from pandemic lows with the T-12 May 31, 2023, RevPAR exceeding the issuance figure of $108.

According to the August 2024 financial reporting, occupancy for the office portion of the collateral had improved to 87.6%, an improvement from 81.2% at YE2022, but below the issuance figure of 92.9%. The largest tenant, KeyBank (31.8% of the net rentable area (NRA), lease expiring in June 2030), downsized by 44,000 sf (3.2% of the NRA) in July 2020 after providing the required 12-month notice and paying a $2.1 million fee. Although KeyBank's lease has a three-year lockout period before the tenant can contract its footprint further, the tenant has two options remaining to further downsize a total of 103,000 sf. Rollover risk is rather limited in the next 12 months with none of the top five largest tenants scheduled to roll. According to Reis, the Downtown submarket reported a Q2 2024 vacancy rate of 21.6%. Given the loan's prolonged stay in special servicing since 2020, Morningstar DBRS maintained a stressed probability of default (POD) in its analysis for this review, resulting in an expected loss (EL) greater than double the pool average.

The largest loan on the servicer's watchlist, D.C. Office Portfolio, is secured by three Class B office buildings in Washington, D.C. The loan is being monitored on the servicers watchlist for a low DSCR with the Q1 2024 annualized figure at 0.93x, in line with the YE2023 and YE2022 DSCRs of 0.95x and 0.92x, respectively, and significantly less than the Morningstar DBRS figure of 1.41x. Occupancy has dropped from the issuance level to 69.5% from 87.8% as per the April 2024 rent roll with occupancy rates ranging from 24.8% to 46.3% and an average rental rate of $44.9 psf. According to Reis, the 2024 average asking rental rate and vacancy figures within a one-mile radius of the subject were reported at $59.1 psf and 16.3%, respectively, while the Downtown submarket reported figures of $56.1 psf and 16.0%, respectively. Given the current climate for the office sector and performance declines below expectation, Morningstar DBRS analyzed the loan with a stressed loan-to-value (LTV) ratio and an elevated POD, resulting in an EL almost 1.5x than the pool average.

Another loan Morningstar DBRS is monitoring is, 141 Fifth Avenue, which is secured by a 4,425 sf retail portion of a 14-story mixed-use building in Manhattan. The loan was placed on the watchlist in October 2023 following the departure of the property's sole tenant, HSBC Bank USA, in October 2022. While servicer commentary indicates the borrower has signed a new tenant to an eight-year lease beginning in September 2024, the loans DSCR fell to -0.07x as of YE2023. Morningstar DBRS has inquired about further details regarding the recent leasing, which has improved occupancy to approximately 46.0%; however, given the recent cash flow disruption and increased vacancy, Morningstar DBRS analyzed the loan with an elevated POD and stressed LTV, resulting in an EL greater than double the pool average.

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, or 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) at https://dbrs.morningstar.com/research/437781.

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 credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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, Inc.
22 West Washington Street
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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 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, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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