DBRS Morningstar Confirms Ratings on All Classes of Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-BNK3 issued by Bank of America Merrill Lynch Commercial Mortgage Trust 2017-BNK3 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 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 (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the prior rating action. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average debt service coverage ratio (DSCR), which was above 2.25 times (x) based on the YE2022 financial reporting. The transaction also benefits from five years of amortization since issuance, as well as some defeasance, loan repayments, and one loan that is shadow-rated investment grade, as further described below.

Per the September 2023 reporting, 61 of the original 63 loans remain in the pool with an aggregate principal balance of $879.4 million, representing collateral reduction of 10.1% since issuance. Five loans, representing 4.4% of the pool, have been fully defeased. No loans are delinquent or in special servicing. There are 14 loans, representing 20.6% of the pool, on the servicer’s watchlist; however, only 10 of these loans, representing 14.7% of the pool, are being monitored for credit-related reasons. In addition, the largest loan on the watchlist, Komo Plaza (Prospectus ID#2; 7.9% of the pool), is being monitored because of an upcoming lease expiration in December 2023 tied to the property’s largest tenant, Sinclair Broadcasting (42.3% of the net rentable area (NRA)); however, the servicer has confirmed that the tenant has provided notice of renewal. With the September 2023 reporting, the former second-largest watchlisted loan, Storbox Self Storage (Prospectus ID#6; 4.7% of the pool), which has historically been monitored for occupancy declines, was removed from the watchlist, most recently reporting a YE2022 DSCR of 2.67x.

The 85 Tenth Avenue loan (Prospectus ID#4; 5.7% of the pool) is secured by a 632,584-square-foot (sf), Class A office property on the west side of Manhattan. Built in 1913 and most recently renovated in 2009, the 11-story structure was acquired by the sponsors in 2007 for $440.0 million. Since acquisition, the sponsor has invested $22.0 million toward capital improvements. Historically, the subject has been well occupied. The largest tenants at issuance were Google (28.9% of the NRA at issuance, expires in February 2026), the General Services Administration (GSA) (28.1% of the NRA, expired September 2020), and Level 3 Communications (17.9% of the NRA at issuance, various lease expirations between June 2017 and January 2023). GSA vacated upon lease expiration, prompting the initiation of a cash sweep in November 2020. As of the September 2023 reporting, reserve accounts had a balance of $5.6 million. Likewise, Level 3 Communications began vacating the property beginning with its first lease expiration in June 2017 and, according to the most recent rent roll, the tenant is no longer at the property. Furthermore, in March 2021, Moet Hennessy USA Inc. (formerly 8.9% of the NRA) vacated after it negotiated a new lease at 7 World Trade Center.

Historical lease rollover has been partially offset by Google’s gradual expansion at the property. At issuance, it was noted that Google had as-of-right expansion options totaling 178,000 sf. Google had exercised expansion options totaling approximately 119,000 sf, according to the March 2023 rent roll, and currently occupies 47.2% of the NRA. There has been positive leasing momentum at the property, with Clear, a biometric screening company, leasing 120,000 sf on a 15-year term. The tenant received 16 months of free rent and a monthly rent abatement of $83,333 through 2027. Nonetheless, occupancy and cash flow have trended downward in recent years with the most recent reporting reflecting an occupancy rate of 79.5%, significantly lower than the issuance figure of 99.6%. Likewise, the property generated $20.6 million of as of YE2022, 43.1% lower than the issuance figure of $36.2 million.

Furthermore, rollover risk is elevated given Google’s leases are scheduled to expire in February 2026, 10 months prior to loan maturity. Although Google has two five-year renewal options, future leasing decisions could be influenced by the success of remote/hybrid work as firms re-evaluate their physical footprints. In January 2023, Google announced layoffs for 12,000 workers, which could be indicative of its limited commitment to physical office space going forward. At issuance, DBRS Morningstar assigned this loan an investment-grade shadow rating because of the property’s high-quality tenancy and the senior position of the A-notes. However, given the trajectory of operating performance and risks associated with the large single-tenant exposure, as noted above, DBRS Morningstar removed the loan’s investment-grade shadow rating with this review. In addition, DBRS Morningstar applied a stressed loan-to-value (LTV) ratio and increased probability of default (POD) assumption in its analysis, resulting in an expected loss that is more than double the pool average.

The 191 Peachtree loan (Prospectus ID#7; 4.6% of the pool) is secured by a 1.2 million-sf office property in Atlanta’s central business district. According to recent news articles, the largest tenant, Deloitte & Touche (Deloitte; 21.3% of the NRA), will not be renewing its lease, which currently expires in May 2024. Deloitte is reportedly moving to the Promenade Tower and will be reducing its footprint in Atlanta’s business district by approximately 50.0%. With this departure, occupancy is expected to drop to approximately 65.0% from the current occupancy rate of 86.0%. The loan is structured with a cash flow sweep that triggers 18 months before Deloitte’s lease expiration until the balance reaches approximately $11.8 million (or $50.0 per sf on Deloitte’s intended vacant space). DBRS Morningstar has reached out to the servicer to request an update on the cash flow sweep. Overall, performance has been strong with the YE2022 DSCR reported at 2.91x, compared with the YE2021 DSCR of 2.87x. According to Reis, office properties in the Downtown submarket reported a Q2 2023 vacancy rate of 13.8%, compared with the Q2 2022 vacancy rate of 20.5%. Although there are mitigating factors with the improvement in the submarket fundamentals and cash management provisions, refinance risk is elevated considering Deloitte’s lease expires two years prior to loan maturity in November 2026. In its analysis, DBRS Morningstar applied a stressed LTV ratio and increased POD assumption resulting in an expected loss that is approximately 2.7x the pool average.

With this review, DBRS Morningstar confirmed that the performance of one loan—Potomac Mills (Prospectus ID#14; 2.4% of the pool)—remains consistent with investment-grade characteristics. This assessment continues to be supported by the loan’s strong credit metrics, experienced sponsorship, and the underlying collateral’s historically stable performance.

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

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 credit 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 credit 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
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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 version 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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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 analyses 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.