DBRS Upgrades Two Classes of Morgan Stanley Capital I Trust 2017-PRME

DBRS Limited (DBRS) upgraded two classes of the Commercial Mortgage Pass-Through Certificates, Series MSC 2017-PRME (the Certificates) issued by Morgan Stanley Capital I Trust 2017-PRME as follows:

-- Class B to AA (sf) from AA (low) (sf)
-- Class C to A (sf) from A (low) sf)

In addition, five classes were confirmed as follows:

-- Class A at AAA (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class X-CP at BBB (sf)
-- Class X-NCP at BBB (sf)

All trends are Stable.

The rating upgrades are reflective of increased credit support for the upgraded bonds as a result of a property release and subsequent paydown of the Class A Certificate in November 2017. This transaction closed in February 2017 and was originally secured by five Marriott brand-managed hotels (1,959 keys total) operating under three different flags and located across five different U.S. states. However, the Dallas/Plano Marriott at Legacy Town Center (Legacy Town Center) hotel was released from the loan last year, resulting in an $87.4 million principal paydown to the transaction (based on a release price set at 115.0% of the asset’s allocated loan balance) with the November 2017 remittance, reflective of a collateral reduction of 23.9%. As a result of this paydown, the Class A certificate balance was reduced by over half to $71.09 million, down from $154.09 million at issuance. The Legacy Town Center property was the fourth-largest asset by allocated loan balance, representing 17.1% of the total loan amount at issuance.

The remaining collateral includes the Courtyard San Francisco Downtown (31.4% of the remaining allocated loan balance), the Seattle Marriott Waterfront (30.9% of the remaining allocated loan balance), the Courtyard Philadelphia Downtown (25.0% of the remaining allocated loan balance) and the Renaissance Tampa International Plaza (12.7% of the remaining allocated loan balance). As noted at issuance, all four of these hotels had renovations in process or planned for the near term. According to the T-12 ending November 2017 Smith Travel Research (STR) reports, two of the four properties showed RevPAR declines over the previous year. The Philadelphia property reported RevPAR at $142.22, down 5.6% year-over year (YOY) and down when compared with the RevPAR reported at issuance of $150.72 as at the T-12 ending October 2016. In addition, the San Francisco property reported RevPAR at $218.96, down 10.2% YOY and down when compared with RevPAR reported at issuance of $244.74 as at the T-12 ending October 2016. At issuance, the San Francisco property was in the process of a $13.1 million ($32,414 per key) renovation to upgrade virtually every aspect of the hotel, from guest rooms to common areas. The work was expected to be complete by July 2017. In addition, property performance was expected to be impacted by the ongoing expansion work to be completed in 2018 for the Moscone Convention Center, the largest conference and exhibit venue in San Francisco, which is located one and a half blocks southwest of the subject. As of February 2018, DBRS has received confirmation from the servicer that the renovation has expanded to an overall budget of $50.0 million, which will include renovations to the lobby, meeting rooms and facade, to name a few. The project is expected to be complete by the end of 2019. In addition, the servicer has confirmed that the work remains ongoing for the convention center, slated for completion by the end of the year. The T-3 figures shown in the San Francisco property’s STR report indicate performance is trending back in line with historical performance metrics, with the T-3 ending November 2017 RevPAR figure of $229.09 down 8.7% YOY, a smaller variance as comparison with the T-12 figures suggests.

Based on the T-12 ending September 2017 reporting, the loan reported an in-place DSCR of 2.48 times (x), in line with the DBRS Term DSCR derived at issuance, but down when compared with the Issuer’s underwriting figure of 2.70x. At issuance, DBRS capped occupancy rates across the portfolio to account for the renovation risk and for the new supply projected in the appraisals for all of the hotels. Based on the current occupancy and average daily rate metrics for each property, as reported for the T-12 period ending November 2017, DBRS derived an updated DBRS NCF figure of $37,156,243, representative of a 4.5% haircut to the in-place figure reported for the T-12 ending September 2017, resulting in a DBRS Term DSCR of 2.36x and a DBRS Refi DSCR of 1.26x.

Although these figures suggest a slight decline from the DBRS projections for the remaining properties at issuance, cash flows remain strong overall and DBRS expects performance and property values will trend upward as the remaining capital improvement projects are completed across the portfolio.

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.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is CMBS North American Surveillance, 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

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 have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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