DBRS Morningstar Confirms Ratings on GS Mortgage Securities Corporation Trust 2017-SLP, Negative Trends; Removes from Under Review with Negative Implications

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

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class X-A at AAA (sf)
-- Class X-B 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. The ratings have been removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

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.

During its review of 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 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 $800.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 138 hotels, two of which are full-service but the majority of which are limited/select-service or extended-stay hotels. In aggregate, the portfolio totals 10,576 keys located in 27 states and across 84 unique metropolitan statistical areas (MSAs) in the United States. The borrower used loan proceeds to refinance $753.1 million of debt, a portion of which was previously securitized across four different securitizations. The remaining $46.9 million in subject loan proceeds financed a $34.2 million upfront property improvement plan (PIP) reserve and returned $1.6 million of cash equity to the sponsor.

The hotels operate under 16 different flags across six different brands, the majority of which (nearly 93.4% of the portfolio by allocated loan balance) are affiliated with either Marriott International, Inc. or Hilton Hotels & Resorts. Only 11 hotels, representing 12.0% of the allocated loan balance, have franchise expiries during the loan term. An affiliate of Aimbridge Hospitality manages 127 hotels in the portfolio (9,302 keys; 84.9% of the total loan amount). Since acquiring the collateral properties from various affiliates in 2015, the sponsor has made a sizable capital investment across the portfolio with $80.7 million ($7,634 per key) spent through Q2 2017. In addition, prior to the sponsor’s acquisition of the portfolio, previous Starwood Capital Group (Starwood) affiliates invested $88.3 million across the collateral, bringing total PIP renovations and elective capital expenditures to $185.2 million ($17,514 per key) since 2012. The upfront PIP reserve of $34.2 million ($3,238 per key) was allocated to required PIP work scheduled for 2018 through the end of 2022. In addition, the loan is structured with ongoing furniture, fixtures, and equipment (FF&E) reserves equal to 4.0% of gross revenue.

The sponsor for this loan is SCG Hotel Investors Holdings, L.P., an affiliate of Starwood. Starwood is a private investment firm that primarily focuses on global real estate with more than $60 billion of assets under management and approximately $45 billion of equity capital raised since 1991.

Per an update from the servicer in August 2020, the borrower requested payment relief, given the ongoing effects of the coronavirus pandemic. A standstill agreement that allowed for the suspension of monthly FF&E reserve payments for June through August 2020 will provide such payment relief. DBRS Morningstar was provided an update on the portfolio’s year-to-date July 2020 performance that reported an average occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of 45.0% (-37.2%), $90 (-16.2%), and $41 (-47.1%), respectively. Prior to the effects of the coronavirus pandemic, the portfolio reported YE2019 average occupancy, ADR, and RevPAR of 71.1%, $109, and $77, respectively, as well as YE2018 average occupancy, ADR, and RevPAR of 71.6%, $107, and $77, respectively. Net cash flow (NCF) performance from 2018 to 2019 remained relatively flat year over year with a 2.0% decline driven by a 2.1% decline in room revenue and a 3.4% decline in food and beverage revenues.

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 $77.9 million and DBRS Morningstar applied a cap rate of 9.75%, which resulted in a DBRS Morningstar Value of $799.1 million, a variance of 31.4% from the appraised value of $1,165 million at issuance. The DBRS Morningstar Value implies an LTV of 100.1% compared with the LTV of 68.7% 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 geographic diversity of the portfolio across 27 states and 84 unique MSAs as well as the substantial capital investment into the portfolio.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 0.50% 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 25% 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 G exceeded the value under the Coronavirus Impact Analysis and therefore DBRS Morningstar presumes that the economic stress from the coronavirus had affected the class.

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.

Classes X-A and X-B are interest-only (IO) certificates that reference 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.

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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