DBRS Assigns Provisional Ratings to BBCMS Trust 2018-RRI

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-RRI (the Certificates) to be issued by BBCMS Trust 2018-RRI (the Issuer):

-- 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 (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BB (high) (sf)
-- Class F at B (sf)

All trends are Stable.

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

The $400.0 million trust mortgage loan is secured by the fee and leasehold interests in a portfolio of 86 limited-service Red Roof Inn (RRI) hotels that have franchise agreements that expire in 2035, well beyond the loan’s maturity. In aggregate, the portfolio totals 10,397 keys located in 25 different states. Twenty-three properties totaling 3,205 keys (44.6% of allocated loan balance) represent Red Roof Inns Inc.’s premier design package, otherwise known as Red Roof PLUS + (RR+). Sponsorship for the loan is provided by a joint venture between the affiliates of Westmont Hospitality Group (Westmont, 20%), which is the owner of the RRI and RR+ brands and Bestford Capital Pte. Ltd. (Bestford Capital; 80%), a Singapore-based investment advisory firm. Westmont owns a diversified portfolio of over 500 hotels across three continents, which include some of the world’s largest hotel brands. RRI West Management, LLC, an affiliate of Westmont, manages the portfolio. All of the properties were previously pledged as collateral for BBCMS 2015-RRI. The $400.0 million mortgage debt, along with $50.0 million of mezzanine debt and $9.6 million of borrower equity, serves to refinance $445.3 million of debt that was originated in 2015, of which the $360.0 million mortgage loan was securitized in BBCMS 2015-RRI, fund $4.5 million in upfront reserves and cover closing costs of $9.8 million. The sponsors will have more than $150.0 million of cash equity remaining in the assets based on the total 2015 acquisition cost. The loan has a two-year initial term with three one-year extension options with a floating-rate (one-month LIBOR plus 3.125% per annum) interest-only (IO) mortgage loan.

The properties are relatively old, having been built between 1975 and 2001. Since acquiring the collateral properties for $575.0 million ($55,304 per key) in 2015, the sponsor has spent approximately $15.5 million ($1,488 per key) in capital investment across the portfolio through January 2018. Although limited in recent years, there was a significant amount of capital invested in the portfolio prior to the 2015 acquisition, totaling approximately $81.3 million ($7,816 per key) by previous Starwood Hotels and Resorts Worldwide, LLC affiliates, bringing total renovations and elective capex invested to $96.7 million ($9,304 per key) since 2011. Based on the site inspections, DBRS assessed the overall portfolio quality to be Average, but individual property quality assessments ranged from Average- to Average. There are 22 hotels that have been upgraded since the last securitization. The properties inspected that had undergone recent renovations were noted to be clean and well maintained and in line with the national-brand standard quality of recently renovated RRI extended-stay hotels, however, the RevPAR increase from the YE2014 level to the trailing 12 months (T-12) ending November 30, 2017 (T-12), achieved by these properties (8.7%) mirrored the overall portfolio (8.5%). Moving forward, the sponsor intends to spend an additional $4.3 million on 14 of the portfolio properties in the near future, equating to about $2,500 per key across such properties. The loan is structured with ongoing furniture, fixtures and equipment reserves that will be collected at 6.0% of gross revenue on a monthly basis in the first year and 5.0% thereafter, as well as a $1.8 million upfront renovation reserve that will be available for planned maintenance throughout the term.

The as-is portfolio appraised value is $630.0 million, assuming a bulk sale, based on an applied cap rate of 7.2%, which equates to a relatively low appraised loan-to-value (LTV) ratio of 63.5%. The DBRS-concluded value of $361.2 million ($34,741 per key) represents a significant 42.7% discount to the bulk sale appraised value and results in a DBRS LTV of 110.7%, which is indicative of high-leverage financing. However, the DBRS value is based on a reversionary cap rate of 11.61%, 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 10.5% and 1.95 times, respectively, are moderate considering the portfolio is primarily securitized by suburban limited-service hotels.

The portfolio is geographically diverse, with the 86 hotel assets located across 25 states and eight regions. Pennsylvania has the highest concentration by allocated loan balance and number of hotels at 9.7% and ten, respectively. The next largest state concentration belongs to Florida, which represents 8.6% of the total loan amount by allocated balance from six hotel assets. No single hotel represents more than 6.5% of the allocated loan balance.

Bestford Capital, the 80% majority owner of the assets and one of the loan sponsors, is considered strong because of its extensive holdings and ample financial resources. Additionally, the guaranty for full-recourse events, such as voluntary bankruptcy, is not capped.

The cumulative investment-grade-rated proceeds per key exposure is $21,233, which is well below the appraiser’s market value of $60,594 per key for the assets and the associated DBRS Debt Yield is attractive at 18.9%. This per-key exposure is comparable to the recovered proceeds per key for the RRI Hotel Portfolio loan that was securitized across two transactions in 2007, and incurred a 51% loss on the securitized whole loan balance. The subject portfolio has considerable overlap with the RRI Hotel Portfolio and DBRS believes that the substantial capital investment made into the subject portfolio since 2011 has resulted in a much higher overall property quality than would have been the case at the time of liquidation.

Classes X-CP and X-NCP 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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.