DBRS Morningstar Assigns Ratings to COMM Trust 2020-CBM Mortgage Trust

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2020-CBM issued (the Certificates) by COMM Trust 2020-CBM Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-CP at AA (low) (sf)
-- Class B at AA (sf)
-- Class X-NCP at AAA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (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 8, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 $684.0 million five-year, interest-only (IO), fixed-rate mortgage loan secured by a first-priority mortgage on fee and leasehold interests on 52 limited-service hotel properties with 7,677 rooms. The whole loan is split into several components, including 10 pari passu notes of different balances totalling $398.0 million as well as one junior promissory note of $286.0 million, which is the junior trust note. The trust loan consists of four senior pari passu notes and the junior trust note for a total trust note balance of $484.0 million. The six nontrust companion notes total $200.0 million for a whole-loan balance of $684.0 million maturing in February 2025.

The sponsor used loan proceeds and $0.56 million of borrower equity to refinance existing debt of $576.3 million, pay closing costs, and fund an upfront renovation reserve of $99.0 million.

The sponsor for the transaction is CBM Joint Venture Limited Partnership (CBM JV), a joint venture between affiliates of Clarion Partners, LLC (Clarion) and the Michigan Office of Retirement Services (the majority equity interest holder). The nonrecourse carveout guarantor is CBM JV. The property manager is Courtyard Management Corporation, a third-party hotel management company and a wholly owned subsidiary of Marriott International, Inc. The management agreement has an initial term ending on December 31, 2025, and will be automatically renewed for all mortgaged properties for two successive 10-year option periods. Clarion acquired the portfolio and other interests between 2005 and 2012, and has invested more than $370.4 million ($48,253 per key) since acquisition in 2005 with plans to invest another $175.3 million over the next four years to counter the lagging performance of its older properties.

The portfolio primarily includes older hotels with 47 properties, representing 90.4% of the rooms, built in 1989 or earlier. In addition, 44 of the properties were last renovated before 2013. The properties are in 25 states with concentrations in California, Florida, Illinois, and Colorado representing 25.2%, 7.6%, 7.1%, and 6.6% of allocated loan amount (ALA), respectively. Seven hotels in various states, representing 11.0% of the allocated loan amount, are subject to ground leases from third-party fee owners. In addition, 39 hotel properties are subject to ground leases between CBM Two Hotels LP. Borrower, as lessee, and C2 Land, L.P. Borrower, as lessor, both related entities. Six hotels are fee simple owned. Two hotels with ground leases terminating in less than 10 years were assigned no ALA with release prices equal to 62.5% of the related appraised value at origination.

On an aggregate basis, the portfolio has outperformed its competitive sets with occupancy, average daily rates (ADR), and revenue per available room penetration rates that have been higher than 100% since 2016. Some minor slippage in occupancy and ADR penetration occurred in 2018, likely because of ongoing renovations, as the loan was structured with a $99.0 million upfront renovation reserve. In addition to the upfront renovation reserve, the loan was structured with $78.0 million that will be reserved over the first four years of the loans for a total reserve of about $177 million. The increased capital investment will help the portfolio maintain its competitive position and improve overall financial performance.

The portfolio suffered performance issues because of the coronavirus pandemic and mandated economic slowdown, which led to the near-total cessation of commercial and leisure travel. The loan transferred to special servicing in April 2020 with a request for coronavirus-related relief. The parties had reached an agreement on modifications and forbearance, but the sponsor decided not to proceed with the modification. The loan returned to master servicing in May 2020 and the borrower agreed to fund any future operating expense, debt service, or reserve shortfalls. As of the June 2020 remittance report, the loan was performing and had returned to the master servicer. The loan is current as of the September 2020 remittance report.

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 $80.1 million and DBRS Morningstar applied a cap rate of 9.0%, which resulted in a DBRS Morningstar Value of $888.4 million, a variance of 25.0% from the appraised value of $1.2 billion at issuance. The DBRS Morningstar Value implies an LTV of 77.0% compared with the LTV of 57.7% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end 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.

Classes X-CP 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 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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