DBRS Assigns Provisional Ratings to CSMC 2017-CHOP

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CHOP (the Certificates) to be issued by CSMC 2017-CHOP. The trends are Stable.

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

All classes will be privately placed.

The Class X-CP and X-EXT balances are notional.

The collateral for the transaction consists of the fee and leasehold interests in a portfolio of 48 select-service, limited-service and extended-stay hotels, totaling 6,401 keys, located in 21 different states across the United States. The hotels operate under eight different flags across three hotel brands that include Marriott, Hilton and Hyatt. The assets are managed by Island Hospitality Management (Island) and Marriott International, Inc. (Marriott). Island manages 34 of the hotels in the portfolio (4,370 keys; 65.5% of the total loan amount), and Marriott manages 14 hotels in the portfolio (2,031 keys; 34.5% of the total loan amount). Sponsorship for this loan is provided by a joint-venture between Colony NorthStar, Inc. and Chatham Lodging Trust. The sponsor acquired the collateral assets in 2014 from Inland American Real Estate Trust as part of a larger $1.1 billion hotel portfolio, which included four additional hotel assets that are not collateral for the subject loan. The sponsor obtained total financing of $817.0 million to facilitate the acquisition of the properties in 2014, which was securitized in the BAMLL 2014-INLD transaction. Each property has been renovated at some point within the last two to three years or is currently undergoing a capex plan. Since 2009, the portfolio has received roughly $201.0 million ($31,400 per key) of capital improvements, of which approximately $109.3 million ($17,084 per key) was contributed by the sponsor following the 2014 acquisition of the portfolio.

The portfolio’s performance has been generally stable over the past few years, despite a few instances where significant declines were reported, particularly in 2009. Revenue per available room (RevPAR) bottomed out in 2009 at $73.13, which represented a 17.5% decrease compared with the previous high of $88.60 in YE2007. Through the T-12 period ending April 30, 2017, RevPAR has fully recovered to $90.59, representing a 23.9% increase from the cyclical low. This strong rebound indicates that without the significant planned renovations, future material RevPAR growth may be challenged. The portfolio reached its highest RevPAR in 2015 at $92.18, following the $31.4 million investment spent on capital improvements across the portfolio during the same year. As of YE2016, the portfolio’s RevPAR has declined by 3.1% over the YE2015 level to $89.31 as a result of displacement from rooms being taken offline to perform over $69.1 million in capital improvements portfolio-wide for property improvement plan (PIP) renovations. However, the portfolio showed a slight uptick in performance during the first few months in 2017, and as of the T-12 period ending April 30, 2017, the assets reported a weighted-average RevPAR of $90.59, a 1.4% increase over the YE2016 level.

The sponsor plans to invest an additional $68.4 million ($10,678 per key) across the portfolio over the next five years for PIPs, cycle renovations and planned capital improvements, a portion of which will be funded from an upfront $16.0 million PIP reserve. Nineteen of the 48 portfolio hotels have brand-mandated PIPs or cycle renovations that occur during the fully extended loan term through 2021, totaling $33.4 million ($13,298 per key). The remaining $35.0 million in the sponsor’s planned capex budget will be used to cover planned maintenance items across the portfolio. The loan is structured with ongoing PIP reserves during the first 19 months of the loan term, which will be collected at a rate of $350,000 per month ($4.2 million annually), capped at $6.65 million. In addition, ongoing furniture, fixtures & equipment reserves will be collected at 4.3% of gross revenue on a monthly basis, and these funds are available for required PIP work (up to a cap) and planned maintenance.

Loan proceeds of $780.0 million along with approximately $79.1 million of equity contribution from the sponsors were used to refinance $817.0 million ($127,636 per key) of existing portfolio debt securitized in the BAMLL 2014-INLD transaction. Remaining proceeds were used to pay estimated closing costs of $21.5 million and fund an upfront PIP reserve of approximately $16.0 million ($2,493 per key). The first mortgage is a 24-month term floating-rate (one-month LIBOR plus 3.30% per annum) interest-only mortgage loan, with three 12-month extension options. The as-is portfolio appraised value of $1.06 billion, based on an average applied cap rate of 6.47%, equates to a relatively high loan-to-value (LTV) of 73.6% for the mortgage loan. The DBRS value of $519,253,073 represents a significant discount to the appraised value, resulting in a DBRS LTV of 150.2% on the full loan amount. However, the DBRS value is based on reversionary cap rates of between 11.0% and 12.0%, with an average applied cap rate of 11.26%, which represents a significant stress over current prevailing market rates. While leverage on the entire mortgage loan is extremely high based on the DBRS Value, the DBRS LTV on the $480 million of rated proceeds through BB (low) is 92.4%, and the DBRS LTV on the $398.5 million of investment-grade-rated proceeds is 76.7%. Furthermore, cumulative rated proceeds through BB (low) are well below the portfolio insurable replacement cost of $615,858,493.

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.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

The principal methodology is North American Single-Asset/Single-Borrower 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.