DBRS Morningstar Confirms All Classes of BX Trust 2017-CQHP

DBRS, Inc. (DBRS Morningstar) confirmed the 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 B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-EXT 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.

The rating confirmations reflect the overall stable performance of the transaction. The interest-only (IO) loan is secured by a portfolio of four Club Quarters Hotels, totaling 1,228 keys, that are all located in prime central business district locations in San Francisco, Chicago, Boston and Philadelphia. The $273.7 million trust loan, along with $61.3 million of mezzanine debt and $8.1 million of sponsor equity, refinanced $336.1 million in existing debt and covered closing costs. In general, the hotel guest rooms are relatively small, ranging from 200 square feet (sf) to 450 sf, and amenities are limited to a fitness center, club room space and workstations. The Club Quarters Hotels’ unique business model focuses on membership-driven corporate demand, enabling the franchise to achieve above-average operating margins.

The loan sponsor, BREP VII, a subsidiary of The Blackstone Group, L.P. (Blackstone), is considered strong given its extensive holdings in the hospitality industry and ample financial resources. As of Q2 2019, Blackstone reported approximately $154.0 billion in real estate assets under management, a $43.0 billion increase since issuance. The sponsor purchased the portfolio in 2016 for approximately $410.0 million and has an implied equity amount of $78.7 million remaining in the project. The loan features a two-year initial term with three one-year extension options. The servicer confirmed in October 2019 that the first extension option had been exercised with the loan now maturing in November 2020.

The loan reported a trailing 12 months (T-12) ending March 31, 2019, debt service coverage ratio (DSCR) of 2.31 times (x), which is slightly below the YE2018 DSCR of 2.47x and DBRS Morningstar Term DSCR of 2.50x derived at issuance. The lower DSCR for the T-12 period was due to a slight decline in the occupancy rate and an increase in general and administrative costs. The primary drivers of the occupancy rate decline were the Philadelphia and Chicago properties, which had room revenue declines of 2.2% and 1.8%, respectively. At issuance, DBRS Morningstar noted there would be significant supply delivered to all four markets during the loan term. Based on DBRS Morningstar research, there have been over 2,900 keys delivered to the collateral’s markets since 2018 and there are over 9,500 additional keys planned with approximately half of the planned future supply located in San Francisco. The additional supply is providing competition for the collateral; however, DBRS Morningstar noted at issuance that underlying demand dynamics in each market are expected to keep pace with new supply.

At issuance, the portfolio reported an average occupancy rate, average daily rate (ADR) and revenue per available room (RevPAR) of 90.9%, $166.42 and $151.23, respectively. The servicer reported a T-12 ending March 2019 occupancy rate, ADR and RevPAR of 74.0%, $182.64 and $137.42, respectively, indicating that the ADR figure substantially increased by 9.7%, offset by the considerable occupancy rate decline. The portfolio’s RevPAR steadily increased from 2013 onward before plateauing at $153.80 in YE2016 and steadily declining since then. DBRS Morningstar continues to monitor the collateral’s performance. The portfolio benefits from the collateral’s desirable locations within major urban markets, geographic diversity and strong sponsorship.

Class X-EXT is an IO certificate that references 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 Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes loan-level data for most outstanding commercial mortgage-backed security transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is the North American CMBS Surveillance Methodology, which can be found on 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 rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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