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

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

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at BBB (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)

All trends are Stable. The Class X-A and Class-B are notional.

All classes have been privately placed.

The $800.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 138 hotels, two of which are considered full-service but the majority of which are limited/select-service or extended-stay hotels. In aggregate, the portfolio totals 10,576 keys located in 27 different states and in 84 unique metropolitan statistical areas across the country. The hotels operate under 16 different flags across six different brands, the majority of which, or nearly 93.4% of the portfolio by allocated loan balance, are affiliated with either the Marriott International, Inc. or Hilton Hotels & Resorts brand families. Only 11 hotels, representing 12.0% of the allocated loan balance, have franchise expiries during the loan term. Most of the assets are managed by an affiliate of Aimbridge Hospitality, which manages 127 hotels in the portfolio (9,302 keys; 84.9% of the total loan amount), while the remaining 11 properties are managed by either Hersha Hospitality Management or Schulte Hospitality Group Inc. Sponsorship for the loan is provided by SCG Hotel Investors Holdings, L.P., an affiliate of Starwood Capital Group (Starwood), which owns 276 select-service properties across the country, including the collateral properties, each of which was previously acquired by an affiliate of Starwood between 2007 and 2015. Of the 138 properties that comprise the portfolio, 116 were previously pledged as collateral for the mortgage loan included in the BBCMS 2015-SLP securitization, eight acted as collateral to secure different securitized mortgage loans and 14 were unencumbered.

Loan proceeds of $800.0 million were used to refinance $751.5 million of debt, a portion of which was previously securitized across four different securitizations: $592.8 million of debt securitized in BBCMS 2015-SLP; $45.1 million securitized in COMM 2014-CR15; $23.7 million securitized in WFCM 2013-LC12; $14.4 million in WFRBS 2013-C15; and $13.7 million in WFRBS 2014-LC14. The remaining $48.5 million in subject loan proceeds financed a $34.2 million upfront property improvement plan (PIP) reserve, returned $1.6 million of cash equity to the sponsor, paid $1.4 million of stub interest and paid diligence and other closing costs totaling $9.6 million. Of the $800.0 million in total debt, $332.7 million consists of a senior A-note that has been split into a $257.7 million controlling note (A-1) and two pari passu, non-controlling companion loans (A-2 and A-3); the remainder consists of a $467.3 million B-note. The $725.0 million trust loan comprising this transaction represents the controlling piece of the larger A-note and the B-note. The $75.0 million in non-controlling senior notes has been held outside the trust to be contributed to future securitizations. The loan is a five-year, fixed-rate, interest-only mortgage loan with no extension options. Following a one-year lockout period and upon the sale of one or more properties to a third party, the sponsor may prepay the loan in whole or in part by paying the allocated loan amount(s) plus a premium, which increases as additional amounts are prepaid.

The properties were built between 1987 and 2013 and have an average age of 19 years. Since acquiring the collateral properties from various affiliates in 2015, the sponsor has made sizable capital investment across the portfolio, with $80.7 million ($7,634 per key) spent through Q2 2017. In addition, prior to the sponsor’s acquisition of the portfolio, $88.3 million was invested across the collateral by previous Starwood affiliates, bringing total PIP renovations and elective capex invested to $185.2 million ($17,514 per key) since 2012. Notably, the hotels renovated in 2014 and 2015 have experienced significant increases in revenue per available room (RevPAR) penetration relative to their competitive sets, with average RevPAR penetration for assets renovated in 2014 increasing from 118.6% at YE2015 to 126.4% at the trailing 12-months (T-12) June 2017, and average RevPAR penetration for assets renovated in 2015 rising from 113.0% at YE2015 to 120.9% at T-12 June 2017. Moving forward, continued increases in RevPAR penetration are expected, as 47 assets totaling 3,492 keys, or 33% of total rooms, were renovated in 2016 and 2017, and improvements in RevPAR penetrations for these assets have only begun to be realized. The sponsor intends to spend an additional $11.8 million ($1,115 per key) through YE2017 and $34.2 million ($3,238 per key) through 2022, bringing the total capital investment over the loan term to $46.0 million ($4,352 per key).

DBRS assessed the overall portfolio quality to be Average based on the site inspections, but individual property quality assessments ranged from Average (+) to Poor. Given the level of capex invested over the last several years, the properties inspected were generally noted to be modern and attractive but in line with each property’s respective national-brand standards, particularly those on the heels of a recent renovation. However, the Fairfield Inn & Suites in Humble, Texas, was concluded to have Poor property quality, as it sustained extensive damage from Hurricane Harvey and will require that all guest rooms be taken offline during its restoration. While reserves related to the renovation are not required up front, the insurance company has confirmed that it will cover all rebuild costs per the policy, and to the extent that actual insurance proceeds turn out to be less than the estimated cost of the hotel’s remediation, or $4.42 million, then the sponsor will be required to remit the difference into a loss proceeds account. Ongoing furniture, fixtures and equipment reserves, which will be available for planned maintenance throughout the loan term, will be collected at 4.0% of gross revenue on a monthly basis, and an additional $492,981 will be collected monthly for the first 12 months of the loan term to be used for near-term PIP costs.

The collateral portfolio reports an average occupancy of 72.7% for the T-12 June 2017 period. As with the overall hotel market, average daily rates (ADR) and occupancy levels at the subject properties, while not available prior to YE2013, have reportedly posted strong gains since the bottom of the market in 2009. From YE2013 through T-12 June 2017, however, growth has been more modest, with occupancy and ADR growing by 2.4% and 8.8%, respectively, resulting in RevPAR increasing by 11.4% over the period. While annual RevPAR has continued to increase, it has done so at a declining rate, as evidenced by growth of 6.6% in 2014, 3.6% in 2015, 0.5% in 2016, and just 0.4% from YE2016 through T-12 June 2017. DBRS applied a portfolio occupancy rate of 70.9%, which was generally based on a blend of property-level market occupancy caps, historical occupancy rate averages, T-12 June 2017 occupancy rates or declining RevPAR performance caps. For seven properties in Houston, DBRS lowered the occupancy rate levels even below the aforementioned assumption parameters to account for a combination of factors: the annual RevPAR decline trends at the properties from YE2013 to T-12 June 2017 levels, the uncertainty surrounding the city’s current economic environment, specifically as it relates to the region’s dependence on the oil & gas sector, the impact and corresponding recovery from Hurricane Harvey and the fact that the current environment could represent a very late phase of the lodging cycle, in general. The resulting DBRS RevPAR of $78.57 for the portfolio is approximately 2.6% below the T-12 June 2017 figure, 2.2% below the YE2016 level and 1.7% lower than YE2015. In general, the portfolio consistently outperforms the competitive set as indicated by the weighted-average RevPAR indices reported for the T-12 periods ending June 30 in 2015, 2016 and 2017 of 118.0%, 118.4% and 120.6%, respectively.

The as-is portfolio appraised value of $1.17 billion, which assumes a bulk sale and is based on an average implied cap rate of 7.5% on T-12 June 2017 net cash flow, equates to a relatively high loan to value (LTV) ratio of 68.7% for the mortgage loan. The DBRS value of $684,351,311 represents a significant discount to the appraised value, resulting in a DBRS LTV of 116.9% on the full loan amount. However, the DBRS value is based on reversionary cap rates between 10.5% and 13.0%, with an average applied cap rate of 11.39%, which represents a significant stress over current prevailing market rates. While leverage on the entire mortgage loan is high based on the DBRS value, the DBRS LTV on the $496.8 million of investment-grade-rated proceeds is 72.6%. Furthermore, cumulative rated proceeds through BBB are well below the portfolio’s insurable replacement cost of $874,900,000.

Classes X-A and X-B are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint 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. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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.

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