DBRS Morningstar Upgrades Rating on BX Trust 2017-APPL

DBRS Limited (DBRS Morningstar) upgraded the rating on the following class of Commercial Mortgage Pass-Through Certificates, Series 2017-APPL issued by BX Trust 2017-APPL as follows:

-- Class E at AA (sf) from BB (low) (sf)

The trend is Negative because the hospitality sector continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic; however the transaction has benefitted from substantial de-levering associated with property releases thus supporting the upgrade. DBRS Morningstar also removed Class E from Under Review with Negative Implications following this action.

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 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.

As it reviewed the rating for 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 stress 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 trust was secured by 51 limited-service, extended-stay, and full-service hotels totalling 6,154 keys across 17 different states across the United States at issuance. Per the September 2020 remittance, 18 properties remained in the trust with an aggregate principal balance of $204.3 million, representing a collateral reduction of approximately 74.5% that resulted from the release of 33 properties. The remaining 18 properties are located in nine states, including Florida, Oregon, Washington, Colorado, Tennessee, Arizona, North Carolina, South Carolina, and Alabama.

The hotels operate under two international brands–Marriott and Hilton Worldwide–totalling 10 different flags. From issuance, the franchise agreements began to expire in 2017 reaching to 2034 with the heaviest concentration of expirations occurring in 2025 when all but two of the Hilton franchise agreements expire. The loan sponsor, BSHH LLC, an affiliate of Blackstone Real Estate Partners acquired the portfolio, along with 15 other properties not included in the transaction, in May 2013 for $1.1 billion via its acquisition of Apple REIT Six, Inc. The sponsor invested $122.2 million ($3,977 per key annually) of capital expenditures across the collateral portfolio prior to issuance. An additional $13.7 million of renovations were budgeted by the sponsor at issuance that included property improvement plan expenditures to six hotels over the next five years. Loan proceeds of $800.0 million ($12,997 per key) were used to refinance $734.2 million ($119,299 per key) of existing portfolio debt and return $59.0 million of equity to the sponsor.

The loan is a two-year, floating-rate, interest-only mortgage loan with five one-year extension options. The borrowers exercised their second extension option in July 2020 for a new maturity date in July 2021. The loan is currently on the servicer’s watchlist for an increased level of risk. The Borrower has indicated to the servicer of potential cash flow problems in the future and the servicer continues to monitor the loan. There have been no forbearances or relief requests made to date.

DBRS Morningstar derived the net cash flow (NCF) using the latest reported servicer NCF with an adjustment, considering the remaining properties in the trust. The resulting NCF figure was $24.8 million and DBRS Morningstar applied a cap rate of 9.75%, which resulted in a DBRS Morningstar Value of $253.9 million, a variance of 32.3% from the appraised value of $375.2 million at issuance. The DBRS Morningstar Value implies an as-is portfolio LTV of 80.4% compared with the as-is portfolio LTV of 54.4% 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 fairly average nature of the collateral and the individual assets market rank for the remaining properties in the trust reflecting mostly suburban locations.

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 25.0% 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.

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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