Fitch Affirms MSC 2017-HR2 and MOA 2020-HR2 Class E-RR P-T Certificates; Resolves UCO -November 09, 2023 at 06:02 am EST

Fitch Ratings has affirmed all classes of Morgan Stanley Capital I Trust 2017-HR2 commercial mortgage pass-through certificates(MSC 2017-HR2).

In addition, Fitch has affirmed the rating for the 2017 HR2 III Trust horizontal risk retention pass-through certificate (MOA 2020-HR2 EClass E-RR). The Rating Outlooks on classes B,C and X-B have been revised to Stable from Positive. The under criteria observation (UCO) has been resolved.

RATING ACTIONS

Entity / Debt

Rating

Prior

MOA 2020-HR2 E

E-RR 90217BAA3

LT

BBB-sf

Affirmed

BBB-sf

MSC 2017-HR2

A-3 61691NAD7

LT

AAAsf

Affirmed

AAAsf

A-4 61691NAE5

LT

AAAsf

Affirmed

AAAsf

A-S 61691NAH8

LT

AAAsf

Affirmed

AAAsf

A-SB 61691NAC9

LT

AAAsf

Affirmed

AAAsf

B 61691NAJ4

LT

AA-sf

Affirmed

AA-sf

C 61691NAK1

LT

A-sf

Affirmed

A-sf

D 61691NAN5

LT

BBB-sf

Affirmed

BBB-sf

Page

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VIEW ADDITIONAL RATING DETAILS

KEY RATING DRIVERS

Criteria Update: The rating actions reflect the impact of Fitch’s updated ‘U.S. and Canadian Multiborrower CMBS Rating Criteria,’ published on May 22, 2023, and incorporate any changes in loan performance and/or credit enhancement(CE)since Fitch’s prior rating action.

The affirmations reflect the impact of the criteria and generally stable performance of the pool since the prior rating action. Fitch’s current ratings incorporate a ‘Bsf’ rating case loss of 4.86%.

Five loans (16.06%) have been identified as Fitch Loans of Concern (FLOCs). All loans in the pool are current and there are no loans in special servicing.

The largest driver to expected loss is the 260-272 Meserole loan (2.97%), secured by a five-story commercial loft and retail building totaling 70,425-sf located in the East Williamsburg neighborhood of Brooklyn, NY. The loan transferred to special servicing in September 2020 due to payment default. The loan was brought current in July 2021 after a full restatement closed in June 2021, returning to the master servicer in September 2021. Occupancy was reported to be 95% as of YE 2022 and has remained been stable since issuance. However, the debt service coverage ratio (DSCR) has declined to 0.77x from 1.55x at issuance primarily due to higher operating expenses that have nearly doubled since issuance.

Fitch’s loss expectations of 33.53% (prior to concentration adjustments) reflects a 10% stress to the YE 2022 NOI and a 10% cap rate.

The second largest driver to expected losses is Totowa Commons(6.29%), secured by a 271,488-sf multi-tenant power center retail plaza located in Totowa, Passaic County, New Jersey, approximately 20 miles west of New York City. The July 2023 rent roll reflects a current vacancy rate 51.1% primarily due to the departure of Bed Bath & Beyond (34.5% of NRA) following the company’s bankruptcy filing. The property’s current anchor tenant is Home Depot (37.4% NRA; lease expiry in April 2025).

Fitch’s ‘Bsf’ rating case loss of 11.86% (prior to concentration adjustments) is based on a 9% cap rate and a 40% stress to the YE 2022 NOI to reflect reduced rental income and higher vacancy.

The third largest driver to expected losses is Pebble Place & Paseo Verde Portfolio (2.39%), which is secured by two office buildings located in Nevada. Portfolio occupancy has declined to 72% as of June 2023 due to the loss of tenant Credit Acceptable Corporate (previously 24% of portfolio NRA), which vacated up on lease expiration in December 2022.

Fitch’s ‘Bsf’ rating case loss of 26.6% (prior to concentration adjustments) reflects a stressed cap rate of 11% to account for the property quality and suburban location and a 15% stress to the YE 2022 NOI to reflect the increased portfolio vacancy.

Increasing Credit Enhancement: CE has increased since the prior rating action due to amortization and paydown and defeasance. The pool’s outstanding balance has been reduced by 14.4% since issuance. Since the prior rating action, one loan has been disposed. Three loans(3.50%) have been defeased since issuance. No realized losses have incurred to date. Zero loans are in special servicing and/or delinquent.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Downgrades to A-1 through B and the associated IO class X-A are not likely due to the continued expected amortization, position in the capital structure and sufficient CE relative to loss expectations, but may occur should interest shortfalls affect these classes.

Downgrades to classes C, D, X-B and X-D may occur should expected losses for the pool increase substantially from continued underperformance of the FLOCs, particularly 260-272 Meserole and Pebble Place & Paseo Verde Portfolio.

Downgrades to classes E-RR, F-RR, G-RR, H-RR and pass through MOA 2020-HR2 E-RR will occur with a greater certainty of loss from continued performance decline of the FLOCs and/or loans transfer to special servicing.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Factors that could lead to upgrades would include stable to improved asset performance, coupled with additional paydown and/or defeasance. Upgrades to the ‘A-sf’ and ‘AA-sf’ rated classes would likely occur if the performance of the FLOCs stabilizes or if there is significant improvement in CE and/or defeasance; however, adverse selection and increased concentrations, or further underperformance or default of the FLOCs could cause this trend to reverse.

Upgrades to the ‘BBB-sf’ and ‘BBBsf’ rated classes are considered unlikely and would be limited based on the sensitivity to concentrations or the potential for future concentrations. Classes would not be upgraded above ‘Asf’ if there were likelihood of interest shortfalls. Upgrades to the ‘BB-sf’ and ‘B-sf’ rated classes are not likely until the later years in the transaction and only if the performance of the remaining pool is stable and/or there is sufficient CE to the bonds.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com