DBRS Morningstar Confirms All Classes and Maintains Negative Trends on Two Classes of Morgan Stanley Capital I Trust 2017-H1

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

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-D at A (sf)
-- Class D at A (low) (sf)
-- Class E-RR at BBB (sf)
-- Class F-RR at BBB (low) (sf)
-- Class G-RR at BB (low) (sf)
-- Class H-RR at B (low) (sf)

The trends for Classes G-RR and H-RR remain Negative, reflective of the concerns surrounding select loans showing performance declines from issuance, as further described below. All other trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. According to the December 2021 remittance, 56 of the original 58 loans remain in the trust, with loan repayments and scheduled amortization resulting in a collateral reduction of 7.4% since issuance. There are three defeased loans, representing 1.1% of the current pool balance. Two loans, representing 3.4% of the current pool balance, are in special servicing, and 17 loans, representing 22.2% of the current pool balance, are on the servicer’s watchlist.

Of the two loans in special servicing, the largest is the One Presidential loan (Prospectus ID #13, 2.9% of the pool balance), secured by an office property located in the Philadelphia suburb of Bala Cynwyd, Pennsylvania. The loan was previously on the servicer’s watchlist for the upcoming loss of a major tenant at the December 31, 2021, lease expiry and transferred to special servicing with the December 2021 remittance, with the special servicer citing imminent monetary default. Given the recent transfer, there is limited information available on the workout options, but DBRS Morningstar notes the loan is underwater with the occupancy decline and leasing efforts have likely been hampered by the effects of the Coronavirus Disease (COVID-19) pandemic.

DBRS Morningstar is also monitoring performance declines for two large hotel loans on the servicer’s watchlist in the Magnolia Hotel Denver (Prospectus ID #19, 3.7% of the pool) and the DoubleTree Tinton Falls (Prospectus ID #17, 1.9% of the pool) loans. The larger loan is secured by a full-service boutique hotel located in downtown Denver and was previously in special servicing following the sponsor’s request for coronavirus relief. A loan modification was granted and the loan was returned to the master servicer in early 2021, with the loan reporting current since then. Recent financial reporting shows the loan continues to underperform, but the STR report provided for August 2021 shows performance is trending in the right direction.

The DoubleTree Tinton Falls loan is secured by a full-service hotel in Tinton Falls, New Jersey, and that loan was also previously in special servicing before a loan modification and return to the master servicer was processed in early 2021. The collateral hotel was underperforming prior to the pandemic and a $2.1 million reserve established to fund property improvements required by the franchisor had not been spent at the time of the loan’s transfer to special servicing. The servicer reported STR figures for June 2021 that suggested performance was trending in a positive direction and the sponsor remains in compliance with the terms of the loan agreement.

All three of these loans were subject to probability of default penalties to increase the expected loss in the analysis for this review, with the results suggesting the two lowest-rated classes could be subject to increased risk of loss if the credit profiles deteriorate further from the current status. In depth commentary is provided for each of these pivotal loans on the DBRS Viewpoint platform, as outlined below.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#9 – Magnolia Hotel Denver (3.7% of the pool)
-- Prospectus ID#13 – One Presidential (2.9% of the pool)
-- Prospectus ID#17 – DoubleTree Tinton Falls (1.9% of the pool)

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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