DBRS Assigns Provisional Ratings to Braemar Hotels & Resorts Trust 2018-PRME

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-PRME to be issued by Braemar Hotels & Resorts Trust 2018-PRME:

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

The trends are Stable.

All classes will be privately placed. Classes X-CP and X-EXT are notional.

The subject portfolio is secured by four full-service hotels, managed under two different brands and three different flags in four different cities: Seattle (361 keys; 31.0% of allocated loan amount), San Francisco (410 keys; 26.7% of allocated loan amount), Chicago (415 keys; 22.9% of allocated loan amount) and Philadelphia (499 keys; 19.4% of allocated loan amount). The portfolio has a combined room count of 1,685 keys. Management is provided by Marriott International (Marriott) and AccorHotel Group (Accor). Both are global hospitality firms, with Marriott, the largest hotel company in the world, managing more than 6,500 properties worldwide and Accor managing over 4,200 properties. DBRS considers all of the assets to be located in core urban markets with an abundance of demand drivers for commercial and leisure purposes, with the San Francisco location considered one step stronger yet as a super-dense urban market. The $370.0 million subject mortgage loan, along with $65.0 million of mezzanine debt, refinanced $344.3 million of existing debt, returned $60.8 million of sponsor equity, funded reserves and covered closing costs of $29.9 million.

DBRS considers the subject properties to be in the range of Average to Above Average in regard to property quality, depending on the asset. Each property has not only been improved through capital improvement projects, but has also been exceptionally maintained over the years, as evidenced by the $61.6 million ($36,561 per key) invested on the portfolio since 2013, including $37.6 million ($22,336 per key) spent over just the past two years. Furthermore, sponsorship continues to show commitment to the portfolio, with the two Courtyard by Marriott properties at the beginning stages of a major renovation to re-flag the hotels to Marriott’s luxury brand, the Autograph Collection (Autograph). At a total estimated cost of $46.8 million, split as $29.6 million ($72,525 per key) for the Courtyard San Francisco Downtown and $17.2 million ($34,419 per key) for the Courtyard Philadelphia Downtown, the conversions should only benefit the portfolio by elevating the two hotels to true full-service product with higher potential ADR and F&B revenue, which DBRS did not recognize. The sponsor has reserved $25.5 million upfront to cover the remaining 2018 budgeted PIP costs for the two Courtyard hotels, with subsequent PIP items for 2019 escrowed at the beginning of that year.

The portfolio realized steady occupancy gains from 2011–2016 but has since tailed off to an overall occupancy rate of 82.5% as of the T-12 February 2018. DBRS occupancy rates vary by property and market, and in each instance are in line with or below the asset’s seven-year historical average. This is demonstrated through the portfolio’s T-12 February 2018 RevPAR, which is relatively in line with the YE2017 level but 3.4% and 1.6% below the YE2016 and YE2015 levels, respectively. With DBRS occupancy caps, the resulting DBRS portfolio RevPAR of $180.69 is 3.8% below the T-12 February 2018 level and well below the previous few years, closer to the portfolio RevPAR for YE2014 at $180.37.

Loan proceeds refinanced prior existing debt of $344.3 million that was securitized across two separate CMBS transactions (MSC 2017-PRME and COMM 2014-FL4), providing for a large $60.8 million cash-out to the sponsor. According to the April 2018 appraisals by Cushman & Wakefield, the as-is value of the portfolio is $692.0 million ($410,682 per key), using an average cap rate of 6.1%. DBRS applied a blended cap rate of 10.18% to the DBRS NCF, resulting in a DBRS value of $360.7 million ($214,303 per key), a significant 47.9% discount to the appraiser’s concluded value. The DBRS blended cap rate was based on a range of cap rates from 9.75% to 10.5%, taking into account the distinct markets in which each property resides.

Classes X-CP and X-EXT are IO certificates that reference multiple rated tranches. The IO ratings mirror 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 in connection with this rating action.

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

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