DBRS Finalizes Provisional Ratings on GS Mortgage Securities Corporation Trust 2017-STAY

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-STAY (the Certificates) to be issued by GS Mortgage Securities Corporation Trust 2017-STAY. The trends are Stable.

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

All classes have been privately placed.

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

The $200.0 million mortgage loan is secured by the fee interest in a portfolio of 40 economy, extended-stay hotels totaling 5,195 keys, located in 14 different states across the United States. The hotels operate under one sole flag, InTown Suites. The brand is owned by the loan sponsor, Starwood Capital Group Global LP (Starwood), which has substantial experience in the hotel sector and maintains considerable financial wherewithal. Starwood acquired the collateral assets in 2013 when it purchased the InTown Suites platform for $770.0 million from Kimco Realty Corporation. At that time, there were 138 properties operating under the flag, which ownership has expanded to 190 lodging properties totaling 24,161 keys since its acquisition of the platform. The assets are entirely operated by affiliates of the loan sponsor and, as such, do not incur management or franchise fees. Although there is a licensing agreement in place, it does not stipulate a separate fee.

Since acquiring the portfolio in 2013, Starwood has invested roughly $24.1 million ($4,639 per key) of capex across the collateral portfolio, $17.8 million ($3,435 per key) of which was injected in 2016 alone. This includes $16.2 million in capex ($8,122 per key) that served to fully refresh 15 specific properties in the collateral portfolio, representing 38.3% of total keys. The remaining assets have only received light updates. The portfolio has an average age of 19 years, and many of the properties inspected by DBRS were dated and exhibited deferred maintenance, resulting in low curb appeal. Such results can be attributed to the lack of investment across the portfolio as well as the consistently high occupancies at which the properties have operated. The collateral portfolio reports an average occupancy rate of 84.2% dating back to 2007, only dropping below 82.5% to 78.5% in 2009, which was the trough of the Great Recession; however, the collateral represents one of the lowest price points in each respective market, offering value to its blue-collar guests and local demographic. While such high occupancy is likely unsustainable, many guests stay on site for several months as evidenced by the average length of stay across the portfolio of 102 days; this provides some additional stability compared with traditional limited- and full-service hotels. Ownership plans to track revenue per available room (RevPAR) performance at the renovated assets before undertaking additional value-add renovations. Since the hotels are not subject to formal franchise agreements, there will not be any required property improvement plans during the loan term. This limits displacement risk as Starwood invests in the assets on an ongoing basis as needed. The fact that the sponsor is the sole owner of the brand gives it an increased incentive to maintain the collateral. The loan is structured with ongoing furniture, fixtures and equipment reserves that will be collected at 5.0% of gross revenue on a monthly basis, which are available for planned maintenance throughout the term.

As with the overall hotel market, average daily rate and occupancy levels at the subject properties have been posting strong gains over the past few years. The portfolio’s RevPAR has increased each year since 2009, but more recent periods have been increasing at a declining rate. DBRS capped all occupancies at 82.5%, which is below recent historicals for the majority of the portfolio. Dating back to 2014, between 65.6% and 71.8% of the portfolio by allocated loan balance reported occupancy rates in excess of 82.5%. The capped occupancies 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. As a whole, the portfolio’s trailing 12 months (T-12) April 2017 RevPAR is 25.1% above its prior pre-recession peak of $25.09 in 2007, and 3.9% and 10.2% over the YE2016 and YE2015 levels, respectively. Such an increase represents a decline from recent year-over-year increases of 13.7% at YE2015 and 10.4% at YE2014. The resulting DBRS portfolio RevPAR of $29.95 is approximately 3.6% below the T-12 April 2017 level and directly in line with the YE2016 level, given the modest rate increases achieved following recent renovations. As of the April 2017 Smith Travel Research Reports, the portfolio exhibited RevPAR penetration of only 93.7%; however, such competitive sets capture a mix of mid-price and economy extended-stay assets, which are of superior quality and do not directly compete with the subject portfolio’s low-price and minimalistic product offering.

Loan proceeds of $200.0 million ($38,499 per key) were used to refinance $174.5 million ($33,589 per key) of existing portfolio debt, return $19.0 million of equity to the sponsor and cover closing costs of approximately $6.5 million. The prior debt was securitized in the GSMS 2007-GG10 securitization and encumbered 35 of the current portfolio assets. The remaining properties backed other uncrossed mortgage loans that were paid off with equity in March 2017. The loan is a three-year, floating-rate (one-month LIBOR plus 2.87% per annum) interest-only mortgage loan with two one-year extension options. The as-is portfolio appraised value is $333.2 million, assuming a bulk sale, based on a weighted-average applied cap rate of 9.2%, which equates to a relatively moderate appraised loan-to-value (LTV) ratio of 60.1%. The DBRS-concluded value of $213.0 million ($40,991 per key) represents a significant 36.1% discount to the appraised value but results in a DBRS LTV of 93.9%, which is indicative of high-leverage financing; however, the DBRS value is based on a reversionary cap rate of 11.75%, which represents a significant stress over current prevailing market cap rates. Furthermore, the loan’s DBRS Debt Yield is strong at 12.5%, and the portfolio’s insurable replacement cost of $201.0 million just exceeds the mortgage loan amount.

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.

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