Morningstar DBRS Downgrades Credit Ratings on Eight Classes of Morgan Stanley Capital I Trust 2017-H1

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2017-H1 issued by Morgan Stanley Capital I Trust 2017-H1 as follows:

-- Class B to A (sf) from AA (high) (sf)
-- Class X-B to BBB (high) (sf) from AA (low) (sf)
-- Class C to BBB (sf) from A (high) (sf)
-- Class X-D to BBB (low) (sf) from A (sf)
-- Class D to BB (high) (sf) from A (low) (sf)
-- Class E-RR to BB (sf) from BBB (sf)
-- Class F-RR to B (low) (sf) from B (high) (sf)
-- Class G-RR to CCC (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 X-A at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class H-RR at CCC (sf)

Morningstar DBRS maintained the Negative trends on Classes E-RR, and F-RR, but changed the trends on Classes B, C, D, X-B and X-D to Stable from Negative. There are no trends for Classes G-RR and H-RR, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All other classes have Stable trends.

The credit rating downgrades reflect an increase in Morningstar DBRS' liquidated loss projections, driven by one loan in special servicing. One Presidential (Prospectus ID#13, 3.0% of the pool balance) is real estate owned and most recently appraised in June 2023 at a value of $22.3 million, representing a 55.8% decline from the appraised value at issuance. The subject is a suburban office property outside of Philadelphia. The YE2023 occupancy was 69%, with leases representing 22.3% of the net rentable area (NRA) scheduled to roll in the next 12 months. Morningstar DBRS liquidated the loan as part of this analysis, resulting in implied losses of more than $16.0 million.
Morningstar DBRS' expected losses for the remaining pool have also increased, driven in part by the transfer of two additional loans to special servicing. Since the last credit rating action, Selig Portfolio (Prospectus ID#8, 4.5% of the pool balance) and Magnolia Hotel Denver (Prospectus ID#9, 3.8% of the pool balance) have transferred to special servicing because of maturity default. The workout strategy for both loans includes modification negotiations, which include possible maturity extensions. For this review, Morningstar DBRS applied stressed loan-to-value ratios (LTVs) and/or probability of default (PODs) penalties to recognize the increased risk since issuance.

Outside of the loans in special servicing, Morningstar DBRS has identified five other loans, representing 11.7% of the pool balance, primarily backed by office properties, that continue to exhibit performance declines. Excluding the defeased loans, the pool is most concentrated by office properties, which represent 37.6% of the pool balance. Where applicable, Morningstar DBRS increased the POD penalty and/or stressed LTVs for loans exhibiting increased risks from issuance. The resulting weighted-average (WA) expected loss (EL) for these loans is more than double the pool's average.

Morningstar DBRS notes the credit deterioration and increased term default risk in the pool, mainly attributable to the loans noted above, result in additional negative pressure to the junior bonds in the capital stack. Should any additional defaults occur, or property values and/or loan performance decline further, Morningstar DBRS' loss projections may increase. This could result in further credit rating downgrades. As part of this credit rating action, Morningstar DBRS maintained the Negative trends on Classes E-RR, and F-RR to reflect this concern.

As of the August 2024 remittance, 51 of the original 58 loans remained in the trust, with an aggregate balance of $926.9 million, representing a collateral reduction of 15.0% since issuance. There are six fully defeased loans, representing 6.0% of the current pool balance. Eighteen loans, representing 25.2% of the current pool balance, are being monitored on the servicer's watchlist primarily for performance-related concerns. One previously specially serviced loan, 1615 Poydras (Prospectus ID#11), was liquidated from the trust in January 2024, resulting in a realized loss of $4.6 million to the trust, which eroded approximately 20% of the nonrated Class J-RR balance. Since the last credit rating action, interest shortfalls have also increased to $1.4 million as of the August 2024 remittance, from $960,000 in September 2023.

The largest loan in special servicing is the Selig Portfolio, which is secured by seven office buildings totaling 1.1 million square feet in Seattle. The loan transferred to the special servicer in March 2024 for imminent maturity default and subsequently missed its May 2024 maturity date. Per the August 2024 remittance, the loan remains outstanding and delinquent. Per the most recent servicer commentary, discussions regarding a potential loan modification remain ongoing. The subject loan of $41.9 million represents a pari passu portion of a $239.0 million whole loan, with the additional senior notes secured in the CGCMT 2014-GC23 and GSMS 2014-GC22 (also rated by Morningstar DBRS) transactions. Per the April 2024 rent roll, the consolidated occupancy rate across the portfolio was 60.0%, down from 71.6% in June 2023. Tenants totaling 11.0% of the NRA have scheduled lease expirations within the upcoming 12 months. The loan reported a YE2023 debt service coverage ratio (DSCR) of 1.62 times (x), compared with the issuer's DSCR of 2.06x at closing. Office properties within the Central Seattle submarket reported an average vacancy rate of 19.1% in Q2 2024, according to Reis. The borrower has indicated there is continued interest in the collateral properties, noting several ongoing negotiations and scheduled tours from prospective tenants. While the leasing activity and modification discussions are positive developments, Morningstar DBRS' analysis for this loan includes elevated LTV and POD adjustments to reflect the declines in occupancy and cash flow, softening submarket fundamentals, and maturity default. The resulting EL is more than double the overall pool's EL.

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 factor(s) 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.

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 Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.