Morningstar DBRS Confirms All Credit Ratings of Morgan Stanley Capital I Trust 2017-HR2

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2017-HR2 issued by Morgan Stanley Capital I Trust 2017-HR2 as follows:

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

All trends are Stable

The credit rating confirmations reflect Morningstar DBRS' stable outlook for the transaction, with only a small concentration of loans, representing 17.1% of the pool, on the servicer's watchlist and no loans in special servicing. Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of approximately 2.50 times (x) and debt yield of 12.0% for all non-defeased loans, based on the most recent year-end financials.

As of the September 2024 reporting, 39 of the original 42 loans remain in the pool, with an aggregate principal balance of $801.9 million, representing a collateral reduction of 14.9% as a result of loan repayment and scheduled amortization. Three loans, representing 3.5% of the pool, are secured by collateral that has been defeased. By property type, the pool is most concentrated by retail and office properties, representing 34.4% and 19.4% of the pool, respectively. Seven loans, representing 17.1% of the pool, are being monitored on the servicer's watchlist. One of these loans, 504 West 24th Street (Prospectus ID#26; 1.3% of the pool), was listed as delinquent with the last payment made in July 2024; however, the property is 100% occupied by a single-tenant on a lease through October 2031 and the Q2 2024 DSCR was reported at 1.90x. Servicer commentary indicates collections are in process. In its analysis for this review, Morningstar DBRS analyzed nine loans (35.0% of the pool) that exhibited declines in performance since issuance with stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs), resulting in WA expected loss (EL) that was approximately 2.5x the pool's average.

The largest loan on the watchlist, Totowa Commons (Prospectus ID#5; 6.3% of the pool), is secured by a 271,488 square foot (sf) anchored retail center in Totowa, New Jersey. The loan was placed on the watchlist in December 2023 for low occupancy and DSCR. At issuance, the property was fully occupied by six tenants and anchored by Home Depot (37.0% of the net rentable area (NRA)); lease expiration in April 2035), Bed, Bath & Beyond (formerly 34.5% of the NRA), Staples (7.6% of the NRA), and Marshalls (formerly 16.6% of the NRA). While the occupancy rate fell to 48.9%, the June 2024 rent roll indicates the borrower has signed two new leases with Tesla (34.5% of NRA, commencing October 2024) and Lidl (10.0% of NRA, commencing August 2025), which would boost occupancy above 90.0% and closer to the Passaic submarket vacancy rate of 10.1% as of Q2 2024. While the loan reported a depressed DSCR of 0.71x as of Q2 2024, Morningstar DBRS expects performance to rebound to issuance levels with the additional tenancy but not until mid-2025. With this review, Morningstar DBRS analyzed the loan with a stressed LTV and elevated POD, resulting in an EL almost 2.5x the pool average.

The second-largest loan on the watchlist, 925 L Street (Prospectus ID#7; 3.9% of the pool), is secured by a 168,850-sf office property in Sacramento, California. The loan was placed on the watchlist is July 2024 because of the upcoming lease expiration of the property's largest tenant, Legislative Counsel Bureau (LCB; 43.9% of NRA). The lease is scheduled to expire in December 2024, however, according to the most recent servicer commentary, LCB has expressed interest in renewing its lease. The property is 92.2% occupied as of the June 2024 rent roll, in line with historical reporting. According to Reis, the Downtown/Midtown submarket reported a Q2 2024 effective rent of $30.25 per square foot (psf) and a vacancy rate of 20.3%, in comparison with the subject property's in-place rental rate of $38.90 psf. While the loan has historically been a strong performer, most recently reporting a Q2 2024 DSCR of 2.43x, performance would decline significantly if LCB were not to renew. In the absence of any leasing activity and in the event LCB vacates at lease expiration, Morningstar DBRS derived an implied net cash flow of $2.3 million, resulting in an elevated LTV. Given the soft submarket conditions paired with the uncertainty about LCB's lease renewal, Morningstar DBRS analyzed the loan with the implied LTV, resulting in an EL greater than triple the pool average.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

Morningstar DBRS 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.