DBRS Morningstar Assigns Ratings to HMH Trust 2017-NSS

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-NSS (the Certificates) issued by HMH Trust 2017-NSS as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at BBB (sf)
-- Class D at BB (sf)
-- Class E at B (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 14, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 single five-year, fixed-rate promissory note of $204.0 million at an interest-only payment of 4.50%. The note is secured by a first-lien mortgage on a portfolio of loans comprising the fee-simple interest in one hotel and leasehold interests in 21 hotels located in nine states in addition to the furniture, fixtures, equipment and personal property used in the operations of the hotels. The properties have solid brand affiliation with either Hilton Worldwide Holdings Inc.; Hyatt Hotels Corporation; Marriott International, Inc.; or Choice Hotel International, Inc. flags on each hotel. All franchise agreements expire subsequent to loan maturity. Loan payments commenced in August 2017 with the assumed maturity date of July 2022.

The loan facilitated the refinancing of the hotel portfolio, including paydown of the $150.0 million existing mortgage debt and the $61.0 million existing bridge loan as well as funding of a property improvement plan reserve of $13.7 million and other closing costs. The sponsor invested $8.8 million of cash equity, adding to a total of $125.4 million of cash equity in the portfolio. The sponsor also obtained an additional $25.0 million of mezzanine debt in the financing package, within the $26.0 million limit on additional future mezzanine debt permitted in the loan documents. The mezzanine debt is not included in this security offering.

The sponsor and loan guarantor of the transaction is Jay H. Shidler, an individual with control and majority ownership of the borrower. Hersha Hospitality Management L.P. manages five properties representing 44.4% of the initial allocated loan amount (ALA); MHH Management, LLC manages 11 properties representing 39.9% of the initial ALA; and Chartwell Hospitality, LLC manages six properties representing 15.8% of the initial ALA.

Operating history prior to securitization showed that portfolio average occupancy was in the low-70% range with modest steady improvement in average daily rates (ADRs). The 2018 financial statements showed a 12% increase in cash flow from the issuer’s underwritten figure while occupancy held steady at 73%. The 2019 operating statement analysis report cash flow indicated a 3% decline from the issuer’s figure, but with a stable occupancy of 73% and a slight decrease from 2018 in both ADR and occupancy.

As with most hotels in the United States and abroad, the coronavirus pandemic has devastated the operating performance of this portfolio. The loan transferred to special servicing on May 8, 2020, with a request for relief because of delinquency and imminent default caused by the pandemic lockdown. The properties were operating at an average occupancy of 10% to 15%. The special servicer commentary as of August 7, 2020, stated that the borrower was attempting to transfer control of the properties to the mezzanine lender with the special servicer’s involvement while also seeking appointment of a receiver. An important consideration will be maintenance of ground lease payments.

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 $19.9 million and DBRS Morningstar applied a cap rate of 11.6%, which resulted in a DBRS Morningstar Value of $180.7 million, a variance of 49.0% from the appraised value of $356.6 million at issuance. The DBRS Morningstar Value implies an LTV of 112.9% compared with the LTV of 57.0% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the higher end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting concerns associated with the loan’s leasehold structure and sponsorship.

DBRS Morningstar made a negative adjustment for cash flow volatility and a positive adjustment for market fundamentals; however, the adjustments canceled each other out, resulting in no 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.

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 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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