DBRS Finalizes Provisional Ratings on BX Trust 2017-CQHP

DBRS, Inc. (DBRS) finalized its provisional ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CQHP issued by BX Trust 2017-CQHP as follows:

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

The trends are Stable.

All classes have been privately placed. Classes X-CP and X-EXT are notional.

The subject portfolio is secured by four Club Quarters brand-managed hotels totaling 1,228 keys located across four major U.S. cities: San Francisco (346 keys; 39.4% of the allocated loan amount); Chicago (429 keys; 26.4% of the allocated loan amount); Boston, Massachusetts (178 keys; 18.2% of the allocated loan amount); and Philadelphia (275 keys; 16.0% of the allocated loan amount). DBRS considers all of the assets to be located in core urban markets with an abundance of commercial and leisure demand generators. The loan sponsor, Blackstone Real Estate Partners VII-NQ L.P., purchased the portfolio in February 2016 from Masterworks Development Corporation, an affiliate of Club Quarters, for approximately $410.0 million ($333,876 per key). Including the $3.7 million invested since purchase, the current reported cost basis equates to approximately $413.7 million ($336,889 per key) — well in excess of the subject loan amount. The $273.7 million subject mortgage loan, along with $61.3 million of mezzanine debt and $8.1 million of sponsor equity, refinanced $336.1 million in existing debt and paid closing costs.

The subject properties are considered to be of Average property quality and have been adequately maintained over the years, with approximately $18.9 million ($15,415 per key) invested across the portfolio between 2010 and 2016; however, the properties’ interiors are somewhat dated and would benefit from a refresh over the next few years, which seems to be on the sponsor’s wish list. Approximately $3.7 million ($3,013 per key) is budgeted for capital improvements in 2017, and further renovations are planned over the near term.

All four properties are managed by Club Quarters Management Company, LLC, which also acts as the franchise under which the hotels operate, with management agreements scheduled to expire in February 2041. Club Quarters operates 17 hotel properties located in the city centers of major markets across the United States and London, with a focus on a high-occupancy, high-margin business model. The franchise drives corporate negotiated-rate business through memberships with corporate clients that guarantee a minimum number of stays at each location annually in exchange for advanced rates that are agreed on at the beginning of every calendar year. In general, the portfolio’s guest rooms are relatively small, with roughly 75.0% of keys no greater than 250 square feet, and amenities are limited to a modestly sized fitness center, club room space and workstations. There are food and beverage outlets on premises, all of which are leased out to and operated by third parties. Overall, the portfolio represents a relatively lean operation, which enables Club Quarters to offer rates at a discount to market, achieve occupancy levels that are well above market and generate above-average operating margins because of staffing efficiencies and the ability to plan for the year ahead.

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, but in more recent periods, they have been increasing at a declining rate and have turned negative, with the overall portfolio declining from peak YE2016 ADR and revenue per available room (RevPAR) levels as at the trailing 12 months (T-12) ended August 31, 2017. DBRS capped occupancies at levels below recent historicals to account for new supply coming on line over the near term in each market, as well as the fact that the current environment could represent a very late phase in the lodging cycle. The occupancy caps vary by property and market and in each instance are below each hotel’s five-year historical average. As a whole, the portfolio’s T-12 ended August 2017 RevPAR represented a decrease of -1.7% over the YE2016 level. Such increase represents a decline from recent year-over-year increases of 7.7% as at YE2015 and 7.5% as at YE2016. The resulting DBRS portfolio RevPAR of $143.80 is approximately -4.9% below the T-12 ended August 2017 level, -6.5% below the YE2016 level and -6.3% below the borrower’s budget. Notably, the portfolio has been able to achieve and maintain above-average net cash flow (NCF) margins over the years, averaging 46.1% between 2008 and the most recent T-12, with a low of 39.7% in 2009 and a high of 50.9% in 2016. The DBRS NCF margin of 43.9% is on the lower end of this range, with minimal downside based on the last cycle, which was very severe. Given such high and sustainable NCF margins across a variety of RevPAR environments, the portfolio is somewhat insulated from cash flow volatility in the face of declining revenues.

LW Hospitality Advisors LLC determined the as-is individual value of the portfolio to be $422.5 million ($344,055 per key) using cap rates ranging from 7.1% to 8.6%. The DBRS concluded value of $284.9 million ($232,002 per key) represents a significant discount to both the as-is individual and the bulk-sale appraised values of 32.6% and 35.9%, respectively, and is also well below the sponsor’s total cost basis of $413.7 million. The resulting DBRS loan-to-value ratio of 96.1% is indicative of high-leverage financing; however, the DBRS value is based on a reversionary cap rate of 10.35%, 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 of 10.8% and 2.50 times, respectively, are moderate considering the portfolio is primarily securitized by urban limited-service hotels with high NCF margins.

Classes X-CP and X-EXT are interest-only (IO) certificates that reference 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 the 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.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.