DBRS Assigns Provisional Ratings to Hyatt Hotel Portfolio Trust 2017-HYT2

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-HYT2 (the Certificates) to be issued by Hyatt Hotel Portfolio Trust 2017-HYT2:

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

All trends are Stable.

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

The $410.0 million mortgage loan is secured by the fee simple and/or leasehold interest in a portfolio of 38 select-service and extended-stay hotels totaling 4,950 keys, located in 21 different states across the United States. The 27 select-service hotels operate under the Hyatt Place flag, while the 11 extended-stay hotels operate under the Hyatt House flag. The portfolio is geographically diverse and relatively granular, as no single hotel represents greater than 5.0% of the allocated loan balance. DBRS considered only two of the assets, representing 3.2% of the allocated loan amount, to be located in tertiary markets, while the remaining 36 properties are considered to be well located in established suburban areas. The sponsors, affiliates of Lone Star Real Estate Fund III, L.P. (Lone Star) (95.0%) and Aimbridge Hospitality, LLC (Aimbridge) (5.0%), acquired the portfolio for $590.0 million from Hyatt Hotels Corporation (Hyatt) in 2014. In conjunction with the acquisition of the assets, all franchise agreements were extended to November 2034. All 38 properties are managed by Aimbridge, which is a leading independent hotel investment and management firm operating over 700 hotels with more than 85,000 rooms in over 35 states and the Caribbean. Furthermore, the firm is one of the only independent management companies to be recognized as an approved operator for leading hotel brands in the industry.

Since acquiring the portfolio in 2014, the sponsors have invested $55.2 million ($11,155 per key) of capex across the collateral portfolio, including $25.8 million ($5,203 per key) and $25.1 million ($5,077 per key) injected in the portfolio in 2015 and 2016, respectively. Recently completed capital improvements included upgrades to the guest rooms, public space, structural work and exterior enhancements. Property improvement plan (PIP) renovations have been completed on 30 of the assets since acquisition with the remaining eight assets having received PIP renovations by Hyatt prior to selling the assets to the sponsors. The loan is structured with ongoing furniture, fixures and equipment reserves that will be collected at 3.0% of gross revenue on a monthly basis for the first year and 4.0% thereafter and are available for planned maintenance throughout the term. The properties were built between 1990 and 2013, with an average age of 18 years. DBRS assessed the overall portfolio quality to be Average based on the site inspections, but individual property quality assessments ranged from 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 Hyatt full-service and extended-stay hotels.

As with the overall hotel market, average daily rate (ADR) and occupancy levels at the subject properties have been posting strong gains over the past few years. The portfolio’s revenue per available room (RevPAR) has increased each year since 2010, as occupancy and ADR have increased 7.6% and 33.3%, respectively, resulting in an overall RevPAR growth of 43.5%. Although the portfolio’s RevPAR has increased each year since 2010, more recent periods have been increasing at a declining rate. The portfolio RevPAR increased 6.6% in 2015; however, increased only 3.5% in 2016 and 1.7% at the trailing 12 months (T-12) ending July 2017 period. DBRS applied a portfolio occupancy rate of 74.5%, resulting in a RevPAR of $91.19, which is 5.0% lower than the T-12 and directly inline with the 2015, given the modest rate increases achieved following recent renovations. Although RevPAR growth has been decreasing the portfolio’s WA penetration index figures of 111.6% for occupancy, 104.4% for ADR and 116.9% for RevPAR as of the June 2017 STR Report imply that the portfolio’s properties generally outperform their competitive set.

Loan proceeds of $410.0 million ($82,828 per key), along with $172.5 million ($38,848 per key) of mezzanine debt were used to refinance $509.3 million ($102,899 per key) of existing portfolio debt (includes $2.3 million of interest due), of which $340.0 million was securitized in the HYATT 2015-HYT securitization, return $52.2 million of equity to the sponsor, fund $7.9 million of upfront reserves and cover closing costs. The loan is a three-year, floating-rate (one-month LIBOR plus 3.30% per annum) interest-only mortgage loan with two one-year extension options. The as-is portfolio appraised value is $770.0 million, assuming a bulk sale, based on an applied cap rate of 6.5%, which equates to a relatively low appraised loan-to-value (LTV) ratio of 53.2%. The DBRS-concluded value of $413.2 million ($83,472 per key) represents a significant 46.3% discount to the bulk sale appraised value and results in a DBRS LTV of 99.2%, which is indicative of high-leverage financing; however, the DBRS value is based on a reversionary cap rate of 10.81%, which represents a significant stress over current prevailing market cap rates. Furthermore, the loan’s DBRS Debt Yield and DBRS Term DSCR at 10.9% and 1.94 times, respectively, are moderate considering the portfolio is primarily securitized by suburban limited-service hotels.

For more information on this transaction and supporting data, please log into http://launchux.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.

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 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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.