DBRS Morningstar Assigns Ratings to J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL10

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-FL10 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL10 as follows:

-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class X-EXT at BBB (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 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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
At issuance, the transaction consisted of payment streams from six mortgage loans originally backed by 14 commercial real estate properties. The transaction currently has one remaining loan in the pool, The Park Hyatt Beaver Creek Resort, with a current trust balance of $45.0 million and a subordinate B note of $22.5 million. The loan is interest-only (IO) over its fully extended loan term of five years and matures in April 2022. Funds from issuance coupled with the borrower’s equity contribution of $83.4 million, 57.3% of total acquisition cost, was used to fund the purchase of the collateral for $145.5 million. The collateral was closed in mid-March because of the coronavirus pandemic and was reopened again on June 12, 2020.

The collateral is a six-storey, upscale, full-service hotel located in the center of Beaver Creek Village, approximately 100 miles west of the Denver central business district. Most out of state visitors will fly into Denver International and then proceed on ground to the hotel. The collateral has a unique direct access to over 1,800 acres of skiable terrain. The hotel originally opened in 1989 and was renovated between 2013 and 2016. The surrounding area includes various commercial outlets, restaurants, entertainment, and various other services available to guests. The hotel has 190 guest rooms with over 20,000 square feet (sf) of meeting space spread among 15 meeting rooms, a 30,000-sf spa, and 18,000 sf of retail across eight tenants. The collateral was closed from mid-March to June 12, 2020.

Loan collateral encompasses two condominium associations: Hotel A and Village Hall. The Hotel A association consists of guestrooms, spa restaurant, bar, and leased retail space. This association also includes the third-party-owned private residences on the fifth and sixth floors and the third-party-owned vacation club. The sponsor owns 77.1% of the Hotel A condominium. The Village Hall association contains most of the hotel’s function space, seasonal Powder 8 Kitchen and Tap, and banquet kitchens. The sponsor has 33.6% ownership in this association, but has certain blocking rights on certain major decisions. Two companies manage the collateral; Hyatt Hotels Corporation oversees the hotel operations and East West Destination Hospitality manages the spa and retail outlets.

Based upon the DBRS Morningstar value derived at issuance the loan has an LTV of 79.10% which is much higher than the appraised value LTV of only 33.1%. The loan is structured with a seasonality reserve because of the nature of the ski resort when the hotel typically operates below 50.0% occupancy in April, May, October, and November. As of the September reporting $340,000 remains in its seasonality reserve. DBRS Morningstar expects this reserve to fall short in its 2021 slow months because of the business disruptions from the pandemic during its 2020 busy season. As of the most recent financial reporting from June 30, 2020, the collateral produced a trailing 12-month debt service coverage ratio of 1.91 times (x) down from its YE2019 value of 2.26x.

The sponsor of this loan is Ashford Hospitality Prime Inc., a Dallas-based real estate investment trust that invests primarily in luxury hotels and resorts. Its portfolio includes 13 assets across 3,722 rooms throughout the United States and U.S. Virgin Islands. The sponsor has rebranded itself to Braemar Hotels & Resorts, Inc. in April 2018.

The collateral was transferred to the Special Servicer in April 2020 when the borrower stated that the collateral had been affected by coronavirus-related business disruptions. At that time, the borrower requested relief in performing its loan obligations. After further review, the Special Servicer granted no relief or forbearance, and the loan was returned back to the Master Servicer in August 2020. The loan was delinquent on its debt service obligations from April through June but was made current as of July 2020 and remains current as of the September 2020 reporting.

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 approximately $4.8 million and DBRS Morningstar applied a cap rate of 8.50%, which resulted in a DBRS Morningstar Value of $56.9 million, a variance of 58.2% from the appraised value of $136.0 million at issuance. The DBRS Morningstar Value implies an LTV of 79.1% compared with the LTV of 33.1% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the asset’s unique status as the only luxury ski resort in the heart of a bustling skiing village, institutional sponsorship from Ashford Hospitality Prime Inc., and the very high barriers to entry limiting competition and new supply in the local market.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 1.0% to account for property quality.

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 45.0% 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.

Class X-EXT is an 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. In this case, Class D was considered the reference obligation tranche as it is the class that would contribute the interest to Class X-EXT.

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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