DBRS Assigns Provisional Ratings to BX Trust 2017-APPL, Commercial Mortgage Pass-Through Certificates, Series 2017-APPL

DBRS, Inc. (DBRS) has today assigned provisional ratings to the followings classes of Commercial Mortgage Pass-Through Certificates, Series 2017-APPL (the Certificates) to be issued by BX 2017-APPL Mortgage Trust:

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

All trends are Stable.

All classes will be privately placed. The Class X-CP and Class X-EXT are notional.

The $800.0 million mortgage loan is secured by the fee simple and/or leasehold interest in a portfolio of 51 limited-service, extended-stay and full-service hotels totaling 6,154 keys, located in 17 different states across the United States. The portfolio is geographically diverse and relatively granular, as no single hotel represents greater than 8.8% of the allocated loan balance, and no property accounted for more than 8.8% of net operating income based on the trailing 12-month period ending April 2017 (T-12 Period). DBRS considered 43 of the properties – approximately 91.0% of the allocated loan amount – to be located in suburban or urban locations. The hotels operate under two international brands – Marriott International, Inc. and Hilton Worldwide – totaling ten different flags. Hilton Garden Inn, covering 13 of the 51 properties, is the largest flag within the portfolio, as the flag represents 27.7% of the portfolio by allocated mortgage loan amount. The portfolio is managed by eight different national hospitality management firms, with Inn Ventures managing the largest number of keys at 1,493 and having the greatest total allocated loan amount at 33.4%.

Since acquiring the portfolio in 2013, the sponsor, BSHH LLC., an affiliate of Blackstone Real Estate Partners VII, L.P., has invested roughly $122.2 million ($3,997 per key annually) of capex across the collateral portfolio, $51.4 million ($8,370 per key) of which was injected in 2015 alone. Additionally, the sponsor has budgeted to spend $13.7 million on property improvement plan (PIP) expenditures on six hotels over the next five years, which equals approximately $19,062 per key at the six hotels. The loan is structured with ongoing furniture, fixtures and equipment reserves that will be collected at 4.0% of gross revenue on a monthly basis and are available for planned maintenance throughout the term. Because the loan was not structured with an upfront PIP reserve, DBRS applied a net cash flow penalty based on straight-lining the Year 1 and Year 2 budgeted PIP expenditures. Both recently completed and remaining planned capital improvement programs will upgrade public areas, guest rooms and guest amenities to meet brand standards. The properties were built between 1985 and 2009, and the portfolio’s straight-line average year built is 2000. DBRS assessed the overall portfolio quality to be Average based on the site inspections, but individual property quality assessments ranged from Above Average to Average (-). The properties inspected that had undergone recent renovations were noted to be modern and attractive but in line with the national-brand standard quality of recently renovated Marriott and Hilton limited-service hotels.

The portfolio’s performance has been generally stable over the past few years, despite a few instances where significant declines were reported, particularly in 2010. Revenue per available room (RevPAR) bottomed out in 2009 at $71.76, which represented a 15.8% decrease compared with the previous high of $85.24 in YE2008. Through the T-12 period, RevPAR has fully recovered, and then some, to $103.38, representing a 44.1% increase from the cyclical low. Additionally, the portfolio has displayed a stable RevPAR since 2015. Based on allocated loan amount, the portfolio’s weighted-average penetration index figures of 103.6% for occupancy, 109.8% for average daily rate and 114.0% for RevPAR as of the T-12 period imply that the portfolio’s properties generally outperform their competitive set. As of the April 2017 STR Reports, there were 41 properties, representing 74.0% of the allocated loan balance, that exhibited RevPAR penetration indexes above 100.0%, including 13 properties, or 20.8% of the allocated loan amount, achieving strong RevPAR penetration figures over 130.0%.

Loan proceeds of $800.0 million ($12,997 per key) were used to refinance $734.2 million ($119,299 per key) of existing portfolio debt, return $15.3 million of equity to the sponsor and cover closing costs of approximately $13.6 million. The most recent prior senior debt was securitized in the CDGJ Commercial Mortgage Trust 2014-BXCH securitization and encumbered all of the current portfolio assets. The loan is a two-year floating-rate (one-month LIBOR plus 2.15% per annum) interest-only mortgage loan with five one-year extension options. The as-is portfolio appraised value of $1.28 billion, assuming a bulk sale, and $1.16 billion, assuming individual sales, equate to relatively moderate appraised loan-to-value (LTV) ratios of 62.5% and 69.1%, respectively. The DBRS value represents a 41.0% and 34.8% discount to the bulk sale and individual sale valuation, respectively. The DBRS LTV of 105.9% is indicative of high-leverage financing; however, the DBRS value is based on a reversionary cap rate of 10.86%, which represents a significant stress over current prevailing market cap rates. Furthermore, the loan’s DBRS Debt Yield and DBRS Term debt service coverage ratio at 10.2% and 1.88 times, respectively, are moderate considering the portfolio is primarily securitized by suburban limited-service hotels

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 15-E), which contains a 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 rely on the due diligence services outlined in Form 15-E, 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.