DBRS Assigns Provisional Ratings to CGBAM Commercial Mortgage Trust 2013-BREH

DBRS has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2013-BREH (the Certificates), to be issued by CGBAM Commercial Mortgage Trust 2013-BREH. The trends are Stable.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (low) (sf)
-- Class X-ACP at AAA (sf)
-- Class X-BCP at AAA (sf)
-- Class X-NCP at AAA (sf)

All classes have been privately placed pursuant to Rule 144A.

Collateral for the transaction consists of a portfolio of 65 select, full and extended-stay hotels located in 18 states throughout the United States. In addition to the mortgage loan, there is $175 million of subordinate mezzanine debt outside of the trust consisting of a $100 million senior mezzanine loan and a $75 million junior mezzanine loan. The loan sponsor acquired the portfolio in May 2013 for $1.10 billion via its acquisition of Apple REIT Six, Inc. Post-acquisition, the sponsor detailed a capital expenditures plan of $63 million, a portion of which will be funded from an upfront $21.0 million replacement reserve fund. Along with closing costs and other reserves, the sponsor’s total cost basis is $1.20 billion ($1.15 billion excluding one property acquired via the merger that will not serve as collateral for the loan). In addition to the mortgage and mezzanine debt, the acquisition was funded with $18.1 million of assumed debt, $184.4 million of preferred equity from the seller and $218.0 million of cash equity from the sponsor. The loan is sponsored by Blackstone Real Estate Partners VII, L.P. The properties are operated under ten different brands all owned by either Marriott International, Inc. or Hilton Worldwide. The sponsor, along with its affiliated funds, reported ownership interest in approximately 900,000 hotel rooms as of March 31, 2013.

The portfolio overall benefits from relatively strong locations in infill suburban markets, although there are 19 properties located in what DBRS considers tertiary and rural markets. These properties typically generate significantly less cash flow than ones in urban and suburban markets, and in total these 19 assets represent only 19.8% of DBRS underwriting (UW) net cash flow (NCF) (with no individual property representing more than 2.0%). The portfolio also benefits from concentrations in desirable coastal markets such as Portland (Oregon), Seattle and San Francisco/Silicon Valley.

Portfolio performance has improved significantly over the past few years. Revenue per available room (RevPAR) bottomed out in YE2009 at $69.59, which represented a 16.8% decrease compared to the previous high of $83.63 in YE2008. Through the trailing 12-month (T-12) period ending April 30, 2013, RevPAR has fully recovered to $84.87, representing a 22.0% increase from the cyclical low in YE2009 and a 1.5% increase over the previous high in 2008. Historical expense ratios have been low and relatively stable over the past six years, ranging from 66% to 71% (inclusive of furniture, fixtures and equipment (FF&E)). As a result, cash flow declines through the nadir in 2008 followed declining RevPAR, with a YE2009 total revenue figure approximately 27.1% less than the peak achieved in 2008. The peak-to-trough net cash flow decline was less severe than most hotel NCF declines over that period due to the diversity, quality and flags of the assets.

The loan has minimal default risk during the five-year fully extended loan term, as the DBRS Term debt service coverage ratio (DSCR) is high at 2.08x. DBRS Value, a 29.3% discount to the appraised value, results in a modest DBRS loan-to-value (LTV) of 75.7%.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is CMBS Rating Methodology (January 2012), which can be found on our website under Methodologies.