DBRS Morningstar Confirms Ratings on CSAIL 2017-CX10 Commercial Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CX10 issued by CSAIL 2017-CX10 Commercial Mortgage Trust:

-- Class UES-A at BBB (low) (sf)
-- Class UES-B at BB (low) (sf)
-- Class UES-C at B (sf)
-- Class UES-D at B (low) (sf)
-- Class UES-X at B (high) (sf)
-- Class V1-UESA at BB (low) (sf)
-- Class V1-UESD at B (sf)
-- Class V2-UES at B (low) (sf)
-- Class STN-A at AA (low) (sf)
-- Class STN-B at A (low) (sf)
-- Class STN-C at BBB (low) (sf)
-- Class STN-X at A (sf)
-- Class V1-STNA at A (low) (sf)
-- Class V1-STNC at BBB (low) (sf)
-- Class V2-STN at BBB (low) (sf)

All trends are Stable.

For the subject transaction, DBRS Morningstar rates three rake bonds secured by three commercial properties in New York. The certificate groups backed by the loans on the three properties are known as the Yorkshire and Lexington Towers Loan-Specific Certificates and the Standard High Line NYC Loan-Specific Certificates.

The Yorkshire and Lexington Towers Loan-Specific Certificates and backed by the Yorkshire and Lexington Towers loan (the Yorkshire loan), and consist of six classes of certificates. The ratings on these certificates reflect the sustainable cash flow and value for the Yorkshire loan, including structural features such as additional debt and lack of amortization, and qualitative factors such as DBRS Morningstar’s opinion of the underlying collateral quality, the current and expected performance of the real estate market in which the properties are located, as well as the macroeconomic environment and its potential impact on the performance of commercial properties.

The Yorkshire loan refinanced the acquisition of two apartment buildings with a combined 827 units in Manhattan’s Upper East Side neighborhood. The sponsors (The Chetrit Group, LLC and Stellar Management, LLC) purchased the assets in 2014 for $485.0 million from a group associated with Leona Helmsley’s estate. At that time, the buildings were 78.7% occupied and contained 379 rent-stabilized units. According to issuance appraisals, the buildings generated $12.2 million of net operating income, implying a capitalization rate of 2.51%.

In 2017, Natixis Real Estate Capital LLC (Natixis) and UBS Group AG originated the five-year, interest-only (IO) $550.0 million loan, of which $400.0 million is held within various mortgage trusts and $150.0 million is mezzanine debt. The loan facilitated the payoff of acquisition financing; funded upfront reserves; and returned more than $124.0 million in equity, which left the sponsors without any equity remaining in the deal. DBRS Morningstar assigned ratings for the certificates backing the $200.0 million Yorkshire & Lexington Rake Promissory B Note.

Between 2014 and 2017, the sponsor invested $16.4 million ($19,800 per unit) in capital improvements for the Yorkshire Towers property and invested another $3.3 million ($4,000 per unit) for the Lexington Towers property. At issuance the sponsor noted plans to convert to market-rate units, predominantly through tenant buyouts. Although the rent stabilization limits the upside via rent appreciation, it allows for stable occupancy.

The Yorkshire loan was added to the servicer’s watchlist in June 2021 because of a drop in the debt service coverage ratio (DSCR). The financial update for the full-year 2020 showed that occupancy slipped to 87% from 95% a year earlier, while the DSCR fell to 1.21 times (x) from 1.50x in 2019. The occupancy and related cash flow declines appear to be driven by the effects of the Coronavirus Disease (COVID-19) pandemic and the related bans on evictions. DBRS Morningstar notes that there is general uncertainty about the timeline for a return to pre-pandemic revenues for the subject and other similarly located multifamily assets; however, the subject loan remains performing and no delinquencies, defaults, or loan modifications have been reported during the pandemic.

The Standard High Line NYC Loan-Specific Certificates are backed by the Standard Hotel loan, which is collateralized by a 10-year, fixed-rate loan secured by the borrower’s (GC SHL, LLC) fee-simple interest in the high-end Standard, High Line boutique hotel in Manhattan, which contains 338 rooms. Natixis originated the loan, which has a maturity date of October 5, 2027. The single mortgage loan is evidenced by four separate promissory notes with a principal balance of $170 million, including an A-A note totalling $45.0 million, a subordinated A-B note totalling $58.4 million, a B-A note with a principal balance of $36.6 million, and a B-B note with a principal balance of $30.0 million. The loan has an initial term of 120 months and bears a fixed rate of 4.73% with IO payments for the full term. The A-A note is included in the trust and serves as collateral for the pooled certificates. The $58.4 million subordinated A-B note serves as collateral for the rake bonds that DBRS Morningstar rates. The B-A and B-B notes are not included in the trust.

The total financing, along with the borrower’s equity contribution, facilitated the acquisition of the hotel for a purchase price of $340.0 million. The borrower also serves as the loan sponsor and is controlled by Goodwin Gaw, the founder of Gaw Capital Partners, a Hong Kong-based real estate private equity firm. Gaw Capital Partners is ranked the 19th-largest real estate private equity fund in the world, according to Private Equity Real Estate, with more than $12.8 billion of assets under management as of Q1 2017. The purchase of the hotel represented the firm’s 11th hotel investment. The sponsor contributed $172.6 million of equity into the purchase of the property, accounting for more than 50% of the purchase price.

The hotel has an excellent location on Manhattan’s far west side in the Meatpacking District, an area that boasts an abundance of amenities and demand drivers. The neighbourhood’s wide range of high-end retailers, restaurants, bars, and other attractions are important draws for the hotel’s clientele. The district, which is bordered by Chelsea to the north and the West Village to the south, is home to the Whitney Museum of American Art, one of New York’s most famous art institutions. The High Line, a nearly 1.5-mile elevated park, runs through the district and is a popular local amenity. A handful of corporations have a presence in the district, including Google LLC; WeWork; and Samsung Electronics Co., Ltd.

Notwithstanding its high quality, amenities, and location, the hotel’s operating trends have slipped over the past four years and overall net cash flow has dropped substantially since the initial securitization. Prior to the pandemic, the asset saw steadily declining room revenues amplified by massive declines in food and beverage revenues, which fell by more than 17.4% between YE2017 and YE2019 after falling in previous years. The hotel’s competitive set also experienced a decline over the same period, but to a lesser degree, as hotels across the city are suffering from the delivery of thousands of new hotel rooms over the past few years combined with weakened tourism.

The Standard Hotel loan transferred to special servicing in June 2020 because of cash flow disruptions caused by the mandatory shutdown, leaving the property closed from March 2020 to September 2020. According to August 2021 reporting, the loan was last paid in April 2020 and has $3.2 million in debt service payments outstanding. According to servicer commentary, the property reported occupancy and average daily rate figures as of February 20201 of 41% and $246, respectively, compared with the December 2020 figures of 30% and $242, respectively. The borrower has submitted a request for a workout, which is under review.

The September 2020 appraisal obtained by the special servicer valued the collateral at $241.0 million ($713,000 per key), compared with the value at issuance of $340.0 million ($1.0 million per key), representing a variance of -29.1%. The DBRS Morningstar value of $159.6 million represents a variance of 53.1% from the issuance value and is 33.8% lower the September 2020 appraisal value. Although the September 2020 valuation suggests increased risks for the underlying loan and corresponding certificates, the DBRS Morningstar ratings are reflective of the lower DBRS Morningstar value that was derived in 2020 based on a 5.0% discount to the issuance appraiser’s estimated land value of $168.0 million, and takes the previous performance declines from issuance into account.

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 STN-X and UES-X are 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.

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.

DBRS Morningstar notes that this press release was amended on July 11, 2023, to correct the IO certficates to Classes STN-X and UES-X.

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.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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