DBRS Morningstar Assigns Ratings to Morgan Stanley Capital I Trust 2017-ASHF, Places Certain Ratings Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-ASHF (the Certificates) issued by Morgan Stanley Capital I Trust 2017-ASHF as follows:

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

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

DBRS Morningstar also placed Classes C, D, and E 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 Certificates are backed by a $419.0 million financing of a 17-property portfolio including full-service, limited-service, and extended-stay hotels with a total of 3,128 rooms across seven U.S. states. The majority of the hotels are in primary markets. The sponsor used loan proceeds to retire existing debt of $412.5 million, fund a $2.0 million capital reserve, pay closing costs, and return $6.1 million of cash equity to the sponsor. The initial loan term was two years with an initial maturity in November 2019 followed by five one-year extension options. The sponsor exercised its first option and extended the maturity until November 9, 2020.

Collateral for the loan consists of the fee-simple interests in midpriced hotels associated with flags from nationally recognized brands with strong central reservation systems: Hilton Worldwide Holdings Inc., representing 47.3% of the total allocated loan amount (ALA), and Marriott International Inc., representing 52.7% of ALA. The top five states represented in the portfolio are Indiana (22.1% of ALA), Florida (19.2% of ALA), Texas (18.3% of ALA), Virginia (16.4% of ALA), and California (12.2% of ALA). The hotels were constructed between 1969 and 2004 and had an average age of 23 years at issuance. Since 2017, the properties have benefited from a portfoliowide total of $103.9 million in capital improvements in guest rooms, common area, and exteriors. The borrower is permitted to release properties subject to certain conditions and paydown of the loan balance by 115% of the released property’s respective ALA.

The sponsor for the transaction is Ashford Hospitality Trust, Inc., a publicly traded real estate investment trust and an experienced hotel investment company. Marriott International, Inc. manages five of the hotels while Remington Lodging and Hospitality LLC manages the remaining 12 hotels.

Over the past two years, the portfolio’s performance was in line with issuance levels, but occupancy declined slightly to 77.3% at YE2019 from 79.4% at issuance. The YE2019 revenue increased over the previous year, but net cash flow (NCF) was 4% lower. In addition, the loan was placed on the watchlist for deferred maintenance and one life safety issue that had to be addressed.

In March 2020, the coronavirus pandemic caused an economic shutdown both domestically and internationally. The portfolio of hotels suffered rapidly declining occupancy and revenue. The loan transferred to special servicing in April 2020 because of an imminent monetary default and was reportedly 90 days delinquent as of the August 2020 remittance. The borrower and servicer are working to effect a debt service payment deferral and reserve deposits for a three-month period with an option to extend for an additional three months. Deferred payments would be repaid over the subsequent 12-month period.

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 $41.0 million and DBRS Morningstar applied a cap rate of 9.3%, which resulted in a DBRS Morningstar Value of $440.0 million, a variance of 24.8% from the appraised value of $585.0 million at issuance. The DBRS Morningstar Value implies an LTV of 95.5% compared with the LTV of 72.0% 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 the portfolio’s geographic diversity (as it is spread across seven states and 13 metropolitan statistical areas) as well as a relatively strong historical revenue per available room penetration rate across the portfolio.

DBRS Morningstar made no qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis.

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 was insulated from loss.

The DBRS Morningstar ratings assigned to Classes C, D, and E 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 XEXT is interest-only (IO) certificate 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 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].

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277