DBRS Morningstar Assigns Ratings to CLNY Trust 2019-IKPR, Places Certain Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-IKPR issued by CLNY Trust 2019-IKPR as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class G at CCC (sf)

The trend for Class A is Negative. DBRS Morningstar has placed Classes B, C, D, E, and F Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral. DBRS Morningstar also designated Class G as having Interest in Arrears.

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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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
This transaction is secured by a portfolio of 46 extended-stay, limited-service, and full-service hotels in 16 states across the U.S. with a total of 5,948 guest rooms. The properties are conjoined by cross-defaulted and cross-collateralized mortgages, deeds of trust, indenture deeds of trust or similar instruments applicable in each jurisdiction, plus liens on the furniture, fixtures, equipment, and leases used in the operations of the hotels. The portfolio is diversified in terms of location and hotel type: three full-service hotels represent 6.5% of total rooms, seven select-service hotels represent 15.2% of total rooms, and 36 extended-stay hotels represent 78.3% of total rooms. No single hotel represents more than 3.8% of total rooms. Four states contain properties with total allocated loan amounts (ALA) in excess of 10% of the mortgage loan balance (California: 22.1%, New Jersey: 14.5%, Washington: 11.1%, and Florida: 10.1%).

Loan proceeds were used to refinance existing debt of $830.9 million, pay closing costs, and fund a property improvement plan reserve of $26.0 million. The loan is structured with an initial term of two years with five one-year extension options. The sponsor invested $20.8 million of cash equity at closing. There is additional financing in the form of $45.0 million of senior mezzanine debt and $55.0 million of junior mezzanine debt, neither of which is included as part of this transaction.

The sponsors for this loan are Colony Capital and affiliates of Chatham Lodging, L.P. The nonrecourse carveout guarantor is Chatham Lodging, L.P. The sponsors acquired the properties in mid-2014 and have invested approximately $110.0 million, or $18,500 per room, in capital improvements to upgrade the common areas, guest rooms, and hotel amenities. At origination, the sponsors had planned to invest another $113.7 million, or $19,116 per room, over the next five years.

Property releases for individual hotels are permitted subject to a debt yield test and, in most cases, the payment of a release premium. For the first 20% of the loan balance, the release premium is 105% of the ALA. After reaching that point, property releases are subject to 110% paydown for the next 15% of the initial loan balance. Thereafter, a 115% release price is required. Five specific hotels are permitted to release upon payment of the par balance, or ALA, with those releases not counting towards the aforementioned thresholds. No releases from the portfolio have been reported.

According to the most recent reporting from March 2020, the trailing 12-month net cash flow (NCF) was down 10.2% from issuance. Further, the servicer reported that the loan is paid through June 2020 but is delinquent as of the August 2020 payment date. Servicer reporting suggests that the borrower is seeking to use reserve funds to bring the loan current, but no agreement to that effect has been concluded. Prior to the effects of the pandemic, the portfolio reported an occupancy rate of 73.3% that was slightly below the issuance occupancy rate of 76.7%. However, because of the effects of the coronavirus pandemic on business and leisure travel, the lodging sector has experienced an unprecedented decline in demand across multiple revenue segments and the portfolio is likely to continue to experience severe occupancy stress in the short term.

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 $73.1 million and DBRS Morningstar applied a cap rate of 9.00%, which resulted in a DBRS Morningstar Value of $812.1 million, a variance of -24.9% from the appraised value of $1,081.9 million at issuance. The DBRS Morningstar Value implies a trust LTV of 93.0% compared with the trust LTV of 69.8% 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 the portfolio’s strong historical performance in terms of occupancy and revenue per available room and the geographic diversity as the portfolio of assets are spread across 16 states.

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 B, C, D, E, and F vary by three or 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.

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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