Morningstar DBRS Changes Trend on One Class of A10 Permanent Asset Financing 2017-II, LLC, to Stable From Negative; Confirms All Credit Ratings

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of A10 Permanent Asset Financing 2017-II, LLC as follows:

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

Morningstar DBRS also changed the trend on Class B to Stable from Negative; the trend on Class A remains Stable while the trend on Class C remains Negative.

The credit rating confirmations reflect the continued overall stable performance of the loan collateral as well as the current credit support to the bonds, with total collateral reduction of 23.3% since issuance, an increase from 2.6% at the previous Morningstar DBRS credit rating action in March 2024. While the increased bond subordination is credit positive to the transaction at the top of the capital stack, Morningstar DBRS maintains its Negative trend on the Class C notes as a result of the increased credit risk to the transaction given the prolonged negative outlook surrounding the majority of the office collateral in the transaction, which, as of the January 2025 reporting, included 10 loans representing 37.5% of the current pool balance. The office concentration includes five of the 10 largest loans in the transaction (25.9% of the pool balance), three of which (15.4% of the pool) are on the servicer's watchlist for occupancy concerns.

The transaction originally had a potential maximum funded balance of $400.0 million with a funding period that expired in December 2020. At that time, the transaction consisted of 38 loans with an aggregate balance of $292.4 million. The transaction reached its maximum funded balance of $297.2 million in December 2019 and began amortizing with the November 2020 Payment Date.

Since the March 2024 credit rating action, one loan has been repaid from the trust. As of the January 2025 remittance, the pool consists of 31 loans with a cumulative trust balance of $228.0 million. As noted above, office properties represent the largest concentration by property type in the transaction. For loans exhibiting increased credit risks, Morningstar DBRS applied loan-to-value (LTV) and/or probability of default (POD) adjustments, resulting in increased loan expected loss levels, where appropriate. The second-largest property type concentration in the transaction is retail, with nine loans representing 20.6% of the current pool balance. This concentration remains consistent from the prior year.

While there are no specially serviced loans, five loans, representing 18.6% of the current pool balance, are on the servicer's watchlist as of the January 2025 remittance. The largest loan on the servicer's watchlist, PacCorp Center (Prospectus ID#38; 7.4% of the current pool), is secured by a Class B office property in Bellevue, Washington. The loan is being monitored on the servicer's watchlist for performance concerns as occupancy continued its a downward trend in recent years. As of January 2025 reporting, the property was 77.7% occupied down from 89.6% as of July 2023 and 100% as of June 2022. Additionally, the property will face upcoming lease rollover concerns as four tenants, representing 20.9% of net rentable area (NRA), are scheduled to mature over the next 24 months. Backfilling the space will likely be challenging given the submarket's vacancy rate for similar vintage properties is approaching 17.0%, according to Reis Q4 2024 reporting. As of the January 2025 reporting, the loan has $0.4 million in a rollover reserve to address upcoming lease expirations; however, there are no funds for new leasing. The borrower was able to execute two new leases in 2024 totaling 23,144 sf despite the limited financial resources available. The larger of the two tenants, Topline, currently subleases the entire 14,156 sf of space leased to ProKarma space. The new direct 40-month lease will commence upon Prokarma's lease expiration in June 2025. The tenant will pay a starting base rental rate of $25.00 psf. The borrower also executed an 8,988-sf lease to Farallon Consulting that commenced in July 2024. The 94-month lease includes a starting base rental rate of $24.00 psf and the tenant received 10 months of free rent.

According to the servicing reporting, the property generated annualized net cash flow (NCF) of $1.5 million for the period ended June 30, 2024, resulting in a debt service coverage ratio (DSCR) of 1.27 times (x) and debt yield of 9.2%. In its current analysis, Morningstar DBRS applied an upward a current LTV adjustment of approximately 76.4% and a 63.0% balloon LTV adjustment as well as increased POD penalty to reflect the increased credit risk of the loan. The loan expected loss is approximately 2.5x greater than the expected loss for the pool.

An additional loan of concern, Clover Building loan (Prospectus ID#17; 3.9% of the current pool), is secured by a Class B office property in Bellevue, Washington. The property has also experienced increased vacancy in recent years after the property's former largest tenant, AIM Consulting (AIM; formerly 29.8% of NRA), vacated upon its August 2023 lease expiration causing occupancy to decrease to 58.8%. Since then, occupancy has further declined to 53.3% as of the September 2024 rent roll. As the trailing 12-month period ended September 2024, the property generated $0.4 million of NCF resulting in a DSCR of 0.46x and debt yield of 5.0%. In its current analysis, Morningstar DBRS applied an upward current LTV adjustment of approximately 117.7% and a 108.8% balloon LTV adjustment as well as increased POD penalty to reflect the increased credit risk of the loan. The loan expected loss is approximately 4.0x greater than the expected loss for the pool.

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 private rating letters 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), 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 (December 13, 2024), https://dbrs.morningstar.com/research/444617.

Other methodologies referenced in this transaction are listed at the end of this press release.

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, Inc.
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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 (December 13, 2024), https://dbrs.morningstar.com/research/444616
-- North American CMBS Insight Model Version 1.2.0.0 (December 13, 2024), https://dbrs.morningstar.com/research/444616
-- 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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064

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