Morningstar DBRS Downgrades Credit Ratings on 11 Classes of CD 2017-CD4 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on 11 classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-CD4 issued by CD 2017-CD4 Mortgage Trust as follows:

-- Class B to AA (sf) from AA (high) (sf)
-- Class C to A (low) (sf) from A (high) (sf)
-- Class D to BB (high) (sf) from BBB (low) (sf)
-- Class E to B (sf) from BB (sf)
-- Class F to CCC (sf) from B (high) (sf)
-- Class X-B to A (sf) from AA (low) (sf)
-- Class X-D to BBB (low) (sf) from BBB (sf)
-- Class X-E to B (high) (sf) from BB (high) (sf)
-- Class X-F to CCC (sf) from BB (low) (sf)
-- Class V-BC to A (low) (sf) from A (high) (sf)
-- Class V-D to BB (high) (sf) from BBB (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-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class V-A at AAA (sf)

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

During the prior credit rating action in October 2023, Morningstar DBRS placed Negative trends on Classes C through F because of concerns related to the high concentration of loans secured by office properties (which represent 35.9% of the pool balance as of the most recent reporting), most of which are located in noncore suburban markets. Since that time, the performance of the underlying collateral securing several of those loans has remained stagnant, or in some cases, has further deteriorated. There are now five loans in special servicing, representing 10.0% of the pool balance, two of which were liquidated from the trust as part of the analysis for this review, resulting in implied loss over $8.0 million. Otherwise, Morningstar DBRS analyzed loans exhibiting increased credit risks with elevated probability of default (POD) penalties and/or stressed loan-to-value ratios (LTVs), resulting in expected losses (ELs) that were between 1.5 times (x) and 3.1x greater than the pool average EL. As a result, the pool's overall adjusted EL has increased since the previous credit rating action, while Morningstar DBRS' expected credit support toward the bottom of the capital stack has moderately deteriorated given the analyzed liquidations as part of this review and realized losses to date totaling $6.0 million. This resulted in downward pressure implied by the model results, supporting the credit rating downgrades with this review.

Morningstar DBRS changed the trends on the certificates noted above to Stable from Negative, as the analysis considered stressed scenarios for those loans exhibiting increased risks from issuance. As such, the resulting credit rating downgrades reflect the general outlook for those affected classes. Should there be unforeseen circumstances, which further increase the risks for the underlying loans in question, Morningstar DBRS notes that trends could change and/or credit ratings could be subject to further downgrades.

Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) approaching 2.0x, based on the most recent financial reporting. In addition, the capital stack includes a sizable $101.1 million balance insulating the investment-grade credit-rated classes, further supporting the credit rating confirmations higher in the capital stack with this review. As of the October 2024 remittance, 45 of the original 47 loans remained in the pool with a trust balance of $725.5 million, representing a collateral reduction of 19.3% since issuance. Since last review, one additional loan has been defeased, with seven loans now representing 9.1% of the pool secured by defeasance. There are five loans in special servicing, representing 10.0% of the pool: however, the two largest, Key Center (Prospectus ID#7, 3.6% of the pool) and Hamilton Crossing (Prospectus ID#12, 2.4% of the pool), are performing and have only been late on payments to date. There are also 15 loans on the servicer's watchlist, representing 45.0% of the pool; however, only seven of the loans, representing 21.0% of the pool, are being monitored for credit-related reasons.

The Los Angeles Corporate Centre (Prospectus ID#4, 7.5% of the pool), is secured by four individual office properties, roughly five miles southeast of the Los Angeles central business district. Prior to March 2023, the portfolio was performing well but the loss of the largest tenant, State Compensation Insurance Fund (21.0% of the net rentable area (NRA)), in March 2023 drove occupancy and cash flows down, and performance has yet to recover. The loan is currently being monitored on the servicer's watchlist for an active lockbox and although the borrower has access to approximately $2.0 million in reserves to cover leasing costs, no leasing momentum has been realized. Additionally, it has not been confirmed if Department of Social Sciences (8.7% of NRA; lease expiration in September 2024) or Southwest Regional Council of Carpenters (4.4% of NRA; lease expiration in December 2024), will renew, which could bring occupancy to less than 50.0%. According to Reis, office properties located in the West San Gabriel Valley submarket reported a Q2 2024 average vacancy rate of 16.9% with an average asking rental rate of $30.64 per square foot (psf), compared with the subject's average rental rate of $35.70 psf. Given the decline in performance and upcoming tenant roll-over, Morningstar DBRS applied stressed LTV ratio and POD assumptions in its analysis for this review, resulting in an EL that was nearly 2.5x pool WA figure.

Key Center is secured by a 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 and while the borrower continues to make payments, they have regularly been late. Servicer commentary indicates 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 historical figures. Per the May 2023 STR report (the most recent on file), the hotel portion of the subject reported a trailing-12-month (T-12) RevPAR of $123, 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 NRA, lease expiring in June 2030), downsized by 44,000 square feet (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 POD and applied a stressed LTV ratio assumption, resulting in an EL that was nearly 2.0x the pool WA figure.

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 at https://dbrs.morningstar.com/research/437781 (August 13, 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. 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.

DBRS Limited
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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/North American CMBS Insight Model v 1.2.0.0 (March 1, 2024), 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 (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, (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.