DBRS Morningstar Assigns Ratings to Morgan Stanley Capital I Trust 2017-CLS

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-CLS issued by Morgan Stanley Capital I Trust 2017-CLS as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at B (high) (sf)
-- Class HRR at B (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about May 20, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

This loan is secured by the Center for Life Science, an office and laboratory building located in Boston’s Longwood Medical Area. The property was constructed in 2008 by BioMed Realty Trust, Inc. (BioMed Realty), and the property was acquired by The Blackstone Group (Blackstone) in January 2016 through Blackstone’s $8.0 billion acquisition of BioMed Realty. The trust amount of $700 million, along with $70.0 million of junior mezzanine debt and $70.0 million of senior mezzanine debt, refinanced existing debt, covered closing costs, and returned over $104.6 million of equity to the sponsor. The loan is interest-only and has an initial term of two years and three one-year extension options.

The property has been 100% occupied by nine tenants since issuance, seven of which are investment-grade tenants including Beth Israel Deaconess Medical Center (Beth Israel) and Boston Children’s Hospital, representing 51.8% of the net rentable area (NRA) and 22.4% of NRA, respectively. Beth Israel and Boston Children’s Hospital have lease expirations extending beyond the fully extended term of the loan of June 2023 and April 2023, respectively. Both of these tenants have extension options and are required to provide notice to the borrower at least 18 months prior to the respective initial lease expiration dates to renew or vacate the subject. The loan is structured with a cash trap in the event the tenants do not renew their leases.

The property is considered a research hub, and many of the tenants have demonstrated long-term commitment to the property by investing significant capital into their units. Based on the YE2019 financials, the loan reported a debt service coverage ratio (DSCR) of 1.58 times (x), compared with the YE2018 DSCR of 1.71x. According to Reis, the office properties located in the Back Bay/Fenway submarket of Boston reported a vacancy rate of 7.1% while properties of similar vintage reported a vacancy rate of 6.4%. The submarket average rental rate was reported at $59.74 per square foot (psf), while properties of similar vintage reported an average rental rate of $69.57 psf, compared with the September 2019 rent roll of $80.50 psf.

The DBRS Morningstar net cash flow (NCF) derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure of $50.0 million and a cap rate of 7.0% was applied, resulting in a DBRS Morningstar Value of $714.0 million, a variance of 34.2% from the appraised value at issuance of $1.1 billion. The DBRS Morningstar Value implies an LTV of 98.0%, which includes the $140.0 million mezzanine debt, as compared with the LTV on the issuance appraised value of 77.4%.

The NCF figure applied as part of the analysis represents a 8.4% variance from the Issuer’s NCF, primarily driven by vacancy loss, tenant improvements, and leasing costs. As of the YE2019 reporting, the servicer reported a NCF figure of $54.9 million, representing a 9.8% increase over the DBRS Morningstar issuance NCF.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the property’s location, high quality, and position in the market. In addition, the 7.0% cap rate applied is substantially above the implied cap rate of 5.0% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 6.75% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.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 www.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

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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