DBRS Morningstar Confirms Ratings on CHT 2017-COSMO Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-COSMO issued by CHT 2017-COSMO Mortgage Trust as follows:

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

Trends on Classes A, B, C, D, and E are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. Classes A , B, C, D, and E have been removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

DBRS Morningstar has also maintained Class F Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral.

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 ratings 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
This transaction closed in November 2017 with an original trust balance of $1.38 billion backed by The Cosmopolitan, a luxury hotel and casino in Las Vegas. Whole-loan proceeds, along with $420.0 million of mezzanine financing, refinanced existing debt of $1.55 billion and returned equity of approximately $227.5 million to Blackstone Real Estate Partners (Blackstone). The interest-only trust loan is structured with a two-year initial term with five one-year renewal options. The property is subject to an operating leasehold interest. The loan is currently on the Servicer’s Watchlist for its upcoming loan expiry in November 2020. The Borrower has been contacted by the Master Servicer regarding its intentions.

In March 2020, the property closed to comply with the coronavirus-related shutdown in Nevada. It reopened on June 4 with government-mandated capacity restrictions in place. Local media indicated that casinos were allowed to reopen at a 50.0% capacity of their normal offerings. Based on the collateral’s website, it appears that the subject is offering all of its normal amenities at limited capacities. Furthermore, according to an article from HVS.com, visitors to Las Vegas dropped by 96.4% in April and May 2020 when compared to the previous year’s figures as stated by the Las Vegas Convention and Visitors Authority.

The Cosmopolitan was completed in 2010 and is situated in an excellent mid-strip location between the Bellagio Hotel & Casino and CityCenter. Collateral amenities include, but are not limited to, 3,027 keys; over 250,000 square feet (sf) of convention and banquet space facilities; 115,000 sf of casino space; 96,000 sf of entertainment space; 23,500 sf of retail space; and spa/fitness facilities. The Cosmopolitan hotel is a part of Marriott’s Autograph Collection and is subject to a license agreement that expires in 2031 with termination options every five years.

Per the July 2020 operating statements, the subject reported a trailing 12-month (T-12) occupancy, average daily rate, and revenue per available room of 87.0%, $352.81, and $306.94, respectively. In comparison, the subject reported T-12 July 2019 figures of 97.5%, $344, and $335, respectively. However, it is important to note that based on the July 2020 T-12 figures, the number of available rooms has dropped by 21.4% from the July 2019 T-12 figures and is expected to drop as the 50.0% operating capacity is realized in the reporting. Per the July 2020 T-12 financials, 33.2% of revenue was generated from guest rooms, 32.5% from food and beverages, and the remaining 34.3% was generated from gaming and alternate sources. Based on the June 2020 T-12 operating statement analysis report figures, room revenue declined 26.2%, food and beverage sales dropped by a similar 26.6%, while the operating expense ratio increased by 25.2% for an overall net cash flow (NCF) decline of 36.2% when comparing to the YE2019 figures.

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 $195.9 million and DBRS Morningstar applied a cap rate of 9.89%, which resulted in a DBRS Morningstar Value of $1.9 billion, a variance of 32.1% from the appraised value of $2.9 billion at issuance. The DBRS Morningstar Value implies an LTV of 69.6% compared with the LTV of 47.3% 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 strong sponsorship by Blackstone Real Estate Partners, its prime location on the Las Vegas strip, and the overall quality of the subject property.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 5.0% to account for 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 was insulated from loss.

The DBRS Morningstar rating assigned to Class F had variances that were generally higher than those results implied by the LTV Sizing Benchmarks when market value declines are assumed under the Coronavirus Impact Analysis. This class remains Under Review with Negative Implications as DBRS Morningstar continues to monitor the evolving economic impact of 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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