DBRS Finalizes Provisional Ratings on Morgan Stanley Capital I Trust 2017-PRME

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series MSC 2017-PRME (the Certificates) issued by Morgan Stanley Capital I Trust 2017-PRME. The trends are Stable. The provisional ratings have been finalized based on information available to DBRS as of February 9, 2017.

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)

All classes have been privately placed.

The Class X-CP and Class X-NCP balances are notional, and interest accrual will be calculated based on the balance of the Class A certificate. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amounts outstanding. DBRS considers the IO certificates’ position within the transaction payment waterfall when determining the appropriate rating.

On January 17, 2017, DBRS released a Request for Comment on its proposed methodology “Rating North American CMBS Interest-Only Certificates.” If this methodology is adopted without changes, DBRS indicates that potential rating actions could be either downgrades or confirmations to IO certificates. Please refer to the January 17, 2017, DBRS press release for further details on the proposed methodology.

The collateral for the transaction consists of five Marriott brand-managed hotels operating under three different flags in five different states across the United States. Combined, the hotels have a total room count of 1,959 keys. DBRS considers three of the assets, totaling a significant 72.4% of the total loan amount, to be located in core urban markets. The remaining two properties, representing 27.6% of the total loan amount, are well located in established suburban areas with stable demand sources. All five of the hotels have been owned by the sponsor since 2007, and the current reported cost basis equates to approximately $559.0 million ($285,350 per key), well in excess of the subject’s loan amount. Furthermore, the sponsor has displayed consistent commitment to the subject properties, investing roughly $51.7 million ($26,366 per key) since 2011, with additional funds budgeted for renovations and upgrades over the next few years.

As with the overall hotel market, ADR and occupancy levels at the subject properties have been posting strong gains over the past few years, but more recent periods have been increasing at a declining rate. DBRS capped underwritten occupancies at levels below recent historicals to account for new supply coming online over the near term in each market, as well as the fact that the current environment could represent a very late phase of the lodging cycle. The occupancy caps vary by property and market and in each instance are in line with or below each hotel’s five-year historical average.

As a whole, the portfolio’s trailing 12-month (T-12) October 2016 revenue per available room (RevPAR) represented growth of 2.9% over the YE2015 level. Such increase represents a decline from recent year-over-year increases of 8.3% at YE2015 and 10.0% at YE2014. The resulting DBRS underwritten portfolio RevPAR of $173.49 is approximately 3.4% below the T-12 October 2016 level, 1.2% below the YE2015 level and 2.1% below the borrower’s budget. Independently, each hotel performs toward the top of its STR competitive set, as evidenced by the portfolio-wide October T-12 2016 RevPAR index of 119.3%.

Loan proceeds refinanced prior existing debt of $335.5 million that was securitized across three loans in three separate 2007 CMBS conduit transactions (WBCMT 2007-C31, WBCMT 2007-C32 and WBCMT 2007-C33) and provided only minimal cash out to the sponsor. As of Q1 2007, the portfolio had an appraised value of $528.6 million ($269,831 per key), and YE2007 net cash flow (NCF) totaled $38.3 million. Nearly ten years later, the subject’s most recent NCF was reported at $51.4 million as of the T-12 ending October 31, 2016, representing a 34.1% increase from 2007, and is nearly double the portfolio’s depressed YE2009 NCF of $26.0 million that occurred in the midst of the Great Recession. HVS Consulting & Valuation determined the as-is value of the portfolio to be $656.7 million ($335,222 per key), using cap rates ranging from 7.5% to 9.0%. The DBRS concluded value of $506.0 million ($258,286 per key) represents a significant 23.0% and a notable 30.9% discount to the as-is and stabilized appraised values, respectively, and is also well below the sponsor’s total cost basis previously highlighted. The resulting DBRS loan-to-value of 72.1% is indicative of leverage that is considered to be very favorable and is further supported by the loan’s strong 13.1% DBRS Debt Yield. The loan has an initial five-year term followed by two one-year extension options and is IO throughout.

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.

The principal methodology is North American CMBS Rating Methodology, which can be found on dbrs.com under Methodologies.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.