DBRS Morningstar Confirms Ratings on All Classes of BANK 2017-BNK7

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-BNK7 issued by BANK 2017-BNK7 as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which generally remains in line with DBRS Morningstar’s expectations since the last rating action in November 2022. Despite increased risks for a select number of loans, overall credit metrics appear to be stable to improving as evidenced by the historical occupancy rate and/or cash flow trends demonstrated over the last few reporting periods. DBRS Morningstar notes the market for office and retail properties continues to be challenging, especially for assets in noncore, tertiary, or smaller metropolitan areas. However, partially mitigating some of these risks are low-to-moderate going-in loan-to-value (LTV) ratios, averaging 49.2% for the pool. In addition, the majority of loans in the pool mature in 2027, providing sponsors with a fair amount of time to work toward stabilization, if needed.

At issuance, the transaction consisted of 65 fixed-rate loans secured by 83 commercial and multifamily properties, with an aggregate trust balance of $1.2 billion. As of the July 2023 remittance, 63 loans remain within the transaction with a trust balance of $1.1 billion, reflecting collateral reduction of 7.2% since issuance. Defeasance has been minimal as only one loan, representing 1.4% of the pool, has fully defeased. Ten loans, representing 16.4% of the pool, are on the servicer’s watchlist, and there are no specially serviced loans.

The largest loan on the servicer’s watchlist, Redondo Beach Hotel Portfolio (Prospectus ID#7; 5.2% of the pool), is secured by two hotels, a 172-key Residence Inn by Marriott and an adjacent 147-key Hilton Garden Inn. The hotels are in Redondo Beach, California, approximately seven miles southeast of the Los Angeles International Airport. The loan was originally added to the servicer’s watchlist in October 2019, because of a decline in the debt service coverage ratio (DSCR), caused primarily by an increase in operating expenses. Subsequently, pandemic-related travel restrictions placed further stress on occupancy and cash flow, prompting the borrower to request financial relief. Forbearance was granted in the form of deferment of furniture, fixtures, and equipment reserves for a period of three months to allow for those amounts to be applied to the monthly debt service obligations. Repayment of the deferred amounts was carried out over a nine-month period. The loan has remained current since the modification request was granted.

Operating performance has improved from the lows reported during the pandemic; however, the portfolio has not reached stabilization. The YE2022 occupancy rate, net cash flow, and DSCR were 72.3%, $2.3 million, and 0.6 times (x), respectively, compared with 91.4%, $6.6 million, and 1.6x at issuance. Despite compressions in occupancy and cash flow, the portfolio’s average daily rate and revenue per available room are rising again, with the YE2022 figures of $157.79 and $116.61 slightly below the issuance figures (trailing 12 months ended June 2017) of $166.00 and $151.00. DBRS Morningstar analysed this loan with a stressed probability of default (POD) penalty, resulting in an expected loss approximately 2.2x the pool average.

Loans representing 23.4% of the pool are backed by office properties. Although the majority of loans collateralized by office properties are performing well, DBRS Morningstar has a cautious outlook for this asset type. Increasing vacancy rates in the broader office market may challenge landlords’ efforts to backfill vacant space and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities. DBRS Morningstar identified three office loans representing 11.0% of the pool that are exhibiting increased credit risk from issuance –which is likely to persist in the near to moderate term, given the continued uncertainty related to end-user demand and current macroeconomic headwinds. DBRS Morningstar applied stressed LTV ratios, and where applicable, increased the POD penalties for these loans.

At issuance, five loans representing 25.1% of the pool balance, were shadow-rated investment grade. With this review, DBRS Morningstar confirms that the performance of four of those loans—General Motors Building (Prospectus ID#1; 9.9% of the pool); Westin Building Exchange (Prospectus ID#5; 6.0% of the pool); The Churchill (Prospectus ID#8; 4.3% of the pool), and Moffett Place B4 (Prospectus ID#13; 2.8% of the pool)—remains consistent with investment-grade characteristics. This assessment continues to be supported by the loans’ strong credit metrics, experienced sponsorship, and the underlying collateral’s historically stable performance. In addition, with this review, DBRS Morningstar removed the investment-grade shadow rating for one loan, Overlook at King of Prussia (Prospectus ID#9; 3.6% of the pool), given deteriorations in the underlying collateral’s operating performance.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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 DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

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

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.

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 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 rating action.

DBRS Morningstar 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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