DBRS Confirms Ratings on Atrium Hotel Portfolio Trust 2018-ATRM

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ATRM issued by Atrium Hotel Portfolio Trust 2018-ATRM as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since closing in June 2018 with an original trust balance of $635.0 million. The collateral consists of 24 hotels assets, including 16 full-service hotels, four extended-stay hotels and four limited-service hotels, totalling 5,734 keys located across 12 states, all of which are cross-collateralized and cross-defaulted. All hotels, except for one, operate under various flags owned by Hilton Hotels & Resorts (Hilton) or Marriott International. The majority of the properties, representing 68.9% of the allocated loan balance, operate as Embassy Suites by Hilton. Other flags within the portfolio include Courtyard by Marriott, Residence Inn by Marriott, Renaissance, Marriott as well as Sheraton Hotels and Resorts. Loan proceeds, along with a $112.4 million equity infusion from Atrium Holding Company (Atrium or the sponsor), retired $672.2 million of existing debt, established $61.9 million of upfront reserves and covered $13.3 million in closing costs. The 24 collateral assets were acquired by the sponsor as part of a 35-hotel portfolio and with other various assets out of a bankruptcy reorganization of John Q Hammons Revocable Trust, JQH Entities and its affiliates. The loan is a two-year floating-rate interest-only (IO) mortgage loan with five one-year extension options.

All but one of the hotels in the portfolio are required to go through property improvement plan (PIP) renovations as a result of the ownership change with total costs estimated at $101.0 million for the portfolio. In addition to the $16.0 million upfront PIP reserve, the sponsor was required to deposit an additional $51.0 million over the first five years ($40.0 million in the first 12 months) and make ongoing furniture, fixtures and equipment reserve deposits equal to 4.0% of gross revenue. According to the June 2019 reporting, the PIP reserve had an ending balance of $48.2 million with $1.4 million deposited during the month. Based on previous disbursements from the PIP reserve and guest reviews for some of the hotels that mentioned ongoing renovations, DBRS confirms that the PIP projects appear to be underway as scheduled. Most recently, the servicer disbursed $2.3 million from the PIP reserve account to the borrower.

According to the year-end (YE) 2018 Operating Statement Analysis Report, the portfolio reported a weighted-average (WA) occupancy rate, average daily rate (ADR) and RevPAR of 70.4%, $130.42 and $92.52, respectively, which has remained relatively unchanged compared with the trailing 12-month period ending February 2018 Smith Travel Research report, which reported figures of 70.8%, $133.94, and $94.86, respectively. Comparing those time periods, the portfolio reported an occupancy decline of 0.4%, an ADR decline of 2.6% and a RevPAR decline of 2.5%. According to the YE2018 financials, the loan reported a debt service coverage ratio (DSCR) of 2.33 times (x) compared with the DBRS Term DSCR of 2.04x at issuance. Although the DSCR has improved over the DBRS figures at issuance, this is a factor of a lower in-place interest rate compared with the stressed scenario assumed by DBRS as the in-place cash flows are actually down by 7.7% from the DBRS Net Cash Flow figure derived at issuance at YE2018. The decline in cash flow since issuance was primarily driven by a 25.7% increase in general and administrative expenses for the portfolio overall; DBRS believes that this is likely the result of one-time expenses related to the financing and ongoing PIP renovations. Although the individual properties generally reported year-over-year cash flow declines in 2018, DBRS believes that these trends will generally improve as capital projects are complete and all rooms are fully online.

The DBRS Debt Yield and DBRS Term DSCR of 11.5% and 2.04x, respectively, are moderate considering the portfolio is primarily securitized by suburban full- and limited-service hotels and the portfolio’s insurable replacement cost of $1.2 billion (excluding land value) is substantially higher than the whole-loan amount of $635.0 million.

Classes X-CP, X-FP and X-NCP are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS provides 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 North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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