DBRS Morningstar Assigns Ratings to Ashford Hospitality Trust 2018-ASHF, Places Certain Classes Under Review with Negative Implications

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

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

The trends for Classes A, B, and C 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 X-EXT 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 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 original collateral for Ashford Hospitality Trust 2018-ASHF was a $782.7 million first mortgage, floating-rate loan originated to refinance existing debt of $977.0 million on a portfolio of one luxury hotel and 22 full-service, select-service, and limited-service extended-stay hotels located in 12 states and the District of Columbia. The largest state concentration was Texas with four properties, 1,296 rooms, and 22.4% of the allocated loan amount (ALA). A total of 5,785 rooms comprised the hotels which were a mix of 17 fee-simple properties representing 67.8% of the ALA, four combined fee and leasehold properties representing 27.0% of the ALA, and one ground-leased property representing 5.3% of the ALA. The sponsor for this loan is Ashford Hospitality Trust, Inc. (Ashford), a publicly traded real estate investment trust which focuses on investing in upper-upscale, full-service hotels in the top 25 metropolitan statistical areas. Per Ashford’s Q2 2020 earnings release, Ashford reported a decline of 88.3% to $16.60 in comparable revenue per available room for all hotels during the quarter given the ongoing effects of the pandemic. Additionally, the average daily rate across their portfolio of 116 hotels decreased 36.4% while occupancy decreased 81.6%.

The loan, originated in April 2018, had an initial two-year term followed by five successive one-year extension options. Additional senior and junior mezzanine financing totalling $202.3 million is held outside the trust and is coterminus with the trust financing. The refinancing required additional borrower’s equity investment of $33.3 million. A $24.7 million capital expenditure reserve was established at closing for future capital requirements at various hotels, including $14.7 million for property improvement plans at three hotels that had not recently been renovated. The sponsor had previously invested $227.5 million ($39,328 per room) in the portfolio hotels since acquisition in 2013.

The original 22 hotel portfolio comprised hotels operating under nine different franchise flags representing three major brands: Marriott for 11 hotels and 52.9% of 2017 net cash flow (NCF), Hilton for six hotels and 21.9% of 2017 NCF, and Hyatt with two hotels and 12.8% of 2017 NCF. Three hotels with 12.5% of the 2017 NCF operated as independent, boutique hotels in select major cities. Most of the hotel properties are in primary markets. Supply additions in the Boston and Savannah, Georgia, markets provided increased competition at those locations.

In 2019, three hotels were sold and released from the security portfolio. The Residence Inn in Tampa, Courtyard in Savannah, and the Marriott Plaza in San Antonio were released with a 115% paydown of the ALA for each hotel bringing the outstanding balance of the pooled trust mortgage down to $720.7 million. DBRS Morningstar made adjustments to the respective NCFs and valuations to account for the released properties in the analysis used to assign these ratings.

Because of the coronavirus pandemic, the lodging sector has experienced a unprecedented decline in demand across multiple revenue segments. The loan was transferred to special servicing on April 8, 2020. The borrower presented a workout strategy to the master servicer requesting a forbearance of up to 18 months. Payment on the loan ceased with the April 9 payment. The special servicer entered into negotiations with the borrower and mezzanine lender regarding potential payment terms including permission to exercise the April 2020 one-year extension option. On July 16, 2020, a standstill agreement was executed providing for an initial three-month term with an option to extend for an additional three months. Deferred payments are to be repaid in instalments over a 12-month period. The hotels are open and taking reservations. Customers are required to follow government guidance regarding social distancing and facial coverings. Some hotel facilities may not be available at this time.

DBRS Morningstar reanalyzed the 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 $83.3 million and DBRS Morningstar applied a cap rate of 9.25%, which resulted in a DBRS Morningstar Value of $900.4 million, a variance of -18.7% from the appraised value of $1,107.5 million at issuance. The DBRS Morningstar Value implies a current trust LTV of 80.1% compared with the implied trust LTV of 65.1% on the appraised value.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the geographic diversity of the portfolio including the location of five properties within urban locations.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 4.00% 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 F exceeded the scenario value and DBRS Morningstar presumed that the coronavirus had affected the class.

The DBRS Morningstar ratings assigned to Classes D, E, and F vary by three of more notches from the results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes are Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of the 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. This class is also placed Under Review with Negative Implications.

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.

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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