DBRS Morningstar Assigns Ratings to MSC 2019-PLND, Places Certain Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-PLND issued by Morgan Stanley Capital I Trust 2019-PLND as follows:

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

The trends for Classes A, B, C, and X-EXT are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

DBRS Morningstar has also placed Classes D, E, F, and G Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral.

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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 $240.0 million first-lien mortgage loan is secured by two Hilton-branded full-service hotels in downtown Portland, Oregon, with 782 rooms, approximately 63,000 square feet (sf) of meeting space, three food and beverage outlets, and 143 parking spaces. The loan refinanced $225.9 million of existing debt, with $10.4 million of equity returned to the sponsor. The loan benefits from strong sponsorship in Brookfield Asset Management Inc. (rated A (low) with a Stable trend by DBRS Morningstar), which is a top-tier institutional real estate investor with over $109 billion in assets.

The Duniway was built in 2002 as the Executive Tower for the Hilton Downtown Portland. After an extensive renovation of $63,000 per room, the property reopened in 2017 as The Duniway Portland. The hotel occupies floors 11 to 20 in a 20-storey building and consists of 327 guest rooms, 2,692 sf of meeting space, a restaurant and lobby bar, an indoor pool, a fitness room, a lobby workstation, a retail corner, and an outdoor patio. The lobby and the Jackrabbit Restaurant and Lobby Bar, which seats 150, are on the ground floor. This property has been repositioned as a luxury boutique hotel, and has operated separately from the Hilton Downtown Portland since reopening. However, guests can enjoy amenities at both hotels.

The Hilton Downtown Portland was built in 1963 and consists of 455 guest rooms in 23 stories with 60,000 sf of meeting space, a fitness center, a lobby workstation, a UPS store, and a retail store. There are 143 parking spaces in the subterranean three-level parking garage. The food and beverage facilities are HopCity Tavern with 131 seats and the Market coffee shop with 38 seats. In 2017, approximately $35,000 per room was spent on improvements including reconfiguring the lobby, updating meeting rooms, and adding new case goods and soft goods to the guest rooms.

The subject properties benefit from their excellent location in the central business district with a high barrier to entry, walking distance to shopping, entertainment, and some of Portland’s best restaurants. Given the central downtown location, the hotels concentrate on the group travel segment. The newly renovated Oregon Convention Center, two miles from the subject properties, is the largest venue of its kind in the Pacific Northwest with 255,000 sf of exhibit space and is a big draw for the properties. The hotels also benefit from a combined 63,000 sf of high-end meeting space, which allows The Duniway Portland to market itself as a luxury boutique hotel with substantial meeting space when using a “sleep at Duniway, meet at Hilton” strategy. The hotels are attractive choices for top room accounts such as Nike, Standard Insurance, and Amazon. In terms of performance, the Smith Travel Research (STR) trailing 12 months (T-12) ended June 30, 2020, for The Duniway Portland showed occupancy, average daily rates (ADR), and revenue per available room (RevPAR) of 76.9%, $204.51, and $157.34, respectively. The STR T-12 ended March 31, 2020, for the Hilton Downtown Portland showed 80.4%, $183.06, and $149.09 for occupancy, ADR, and RevPAR, respectively. Both properties are relatively in line or outperforming their respective competitive sets.

In 2020, the properties sustained a sharp downturn because of the mandatory shutdowns during the coronavirus pandemic. Both hotels were shuttered initially; however, as of September 2020, The Duniway Portland has reopened, while the Hilton Downtown Portland, which primarily relies on group travel and convention activity, remains closed. In addition to the strain put on the hospitality industry from the pandemic, Portland has been experiencing prolonged civil unrest in the surrounding area. In the wake of ongoing protests since late May 2020, foot traffic and local tourism has been minimal in downtown Portland.

Debt service payments were not paid beginning in May 2020 and the loan transferred to special servicing effective in June 2020 for payment default. The servicer has not provided an update on its strategy for this loan. As a result of a foreclosure moratorium imposed by the state of Oregon in June 2020 to assist property owners affected by the pandemic, the special servicer’s options may be limited in the near term. This moratorium applies to lenders on both commercial and residential properties and has been extended through the end of 2020.

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 $18.2 million and DBRS Morningstar applied a cap rate of 8.25%, which resulted in a DBRS Morningstar Value of $221.0 million, a variance of 35.1% from the appraised value of $340.6 million at issuance. The DBRS Morningstar Value implies an LTV of 108.6% compared with the LTV of 70.5% 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 45% 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 through Class G exceeded the value under the Coronavirus Impact Analysis and therefore DBRS Morningstar presumes that the economic stress from coronavirus had affected the class.

The DBRS Morningstar ratings assigned to Classes D, E, F, and G, vary by three of more notches from those results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes remain Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of coronavirus-induced stress on the transaction.

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.

Class X-EXT is an interest-only (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.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.

DBRS Morningstar notes that this press release was amended on October 20, 2020, to correct the appraised value at issuance to $340.6 million from $240.6 million.

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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, Smith Travel Research Reports, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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