DBRS Morningstar Assigns Ratings to BBCMS Trust 2018-CBM

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-CBM (the Certificates) issued by BBCMS Trust 2018-CBM as follows:

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

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 7, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on hospitality performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating market value declines (MVDs) consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a higher stress for hospitality properties, ranging from 25% to 45% based on the type of demand segmentation and asset location, and expects corporate demand and remote fly-to locations to be at the higher end of the value decline.

LOAN/PROPERTY OVERVIEW
The Certificates are backed by a $415.0 million first-mortgage, interest-only, floating-rate loan secured by a portfolio of 30 select-service hotels—29 fee-simple interests, and one leasehold interest—across 15 states with a total of 4,379 keys. California has the largest concentration with six hotels comprising 29.8% of total allocated loan amount (ALA). All of the hotels were built between 1984 and 1989 with an average age of 34 years. The loan was structured with an initial term of two years with five one-year extension options. Presently, the loan is past the initial July 2020 maturity and the servicer is contemplating a one-year loan extension. The initial interest rate was set at a 2.17% spread over one-month Libor with a Libor cap of 4.5%. The spread will increase by 25 basis points when the sponsor exercises the fourth extension option. The total debt package included two mezzanine loans totalling $135.0 million, which are not included in the trust. Courtyard Marriott Corporation manages all properties under an agreement which expires in December 2035. An existing Marriott International, Inc.-controlled reserve account of $15.1 million was recognized at loan closing as a furniture, fixtures, and equipment (FF&E) reserve. In addition, $30.1 million of other reserves were established at closing for renovation and remediation needs. The financing facilitated a return of cash equity of $76.1 million to the sponsor.

Each of the 30 properties can be released from the mortgage and loan collateral, either at a release price equal to (1) 105% of the ALA for the first 10% of the loan’s original principal balance, (2) 110% for up to 20% of the original principal balance, and (3) 115% with respect to further releases. Other conditions, such as a minimum debt yield, also apply.

The sponsor for the financing is Colony Capital, Inc. (Colony Capital). The mortgage loan is full recourse to the borrower, which is a single-purpose entity with no other assets; however, the guarantor for the recourse carveout provisions is Colony Capital Operating Company LLC, an affiliate of Colony Capital. The recourse provisions cap the guarantor’s obligations at 15% of the loan’s outstanding principal balance.

The consolidated portfolio reported weighted-average (WA) occupancy of 72.0% as of the trailing 12-month period ended April 30, 2018, with a wide range from 47.1% to 88.0%. The average was relatively stable for the past five years leading up to securitization. The WA daily rate of $130.10 per room for the portfolio showed very slight improvement for the same time period. Property average daily rates ranged from $102.00 to $191.00 per room per night. The hotels performed well versus their competitive set with all portfolio hotels reporting a revenue per available room penetration index exceeding 100.0% and one hotel reaching 188.9%. DBRS Morningstar has not received updated performance information since issuance.

However, 2020 has been challenging for the portfolio because of the economic slowdown and restricted travel for commercial and leisure markets. The coronavirus pandemic has severely affected individual hotel and aggregate portfolio performance. The loan transferred to special servicing in April 2020 for a nonperforming matured balloon balance and the sponsor failed to make debt service payments from April 2020 to June 2020. The borrower has requested deferral of debt service payments for 90 days and the suspension of all FF&E deposits and insurance reserve deposits. The borrower has also requested that the existing FF&E and capital expenditure reserves be available for cash shortfalls; the special servicer is currently evaluating the request.

DBRS Morningstar reanalyzed the net cash flow (NCF) derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $47.6 million and DBRS Morningstar applied a cap rate of 9.06%, which resulted in a DBRS Morningstar Value of $524.9 million, a variance of 22.2% from the appraised value of $675.0 million at issuance. The DBRS Morningstar Value implies an LTV of 79.0% compared with the LTV of 61.5% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting location, asset quality, and type of lodging asset.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 4.0% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included subjecting the most recent appraised collateral value to generalized CRE asset value decline projections with an assumption of approximately 25% under the moderate scenario. In cases where the rated debt exceeded the scenario value, DBRS Morningstar assumed that a principal writedown had occurred to account for the difference. Because of the reverse-sequential allocation of losses in commercial mortgage-backed security (CMBS) transactions, DBRS Morningstar’s analysis considered the most subordinate certificate first and, if a complete principal writedown of the certificate had occurred during the scenario, DBRS Morningstar repeated the analysis for the second-most subordinate certificate and so on until the rated debt no longer exceeded the scenario value.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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