DBRS Morningstar Confirms Ratings on InTown Hotel Portfolio Trust 2018-STAY, Maintains Certain Classes Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-STAY issued by InTown Hotel Portfolio Trust 2018-STAY as follows:

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

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

DBRS Morningstar has also maintained Classes E, F, and G Under Review with Negative Implications, given the negative impact of the coronavirus 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
The $471.0 million mortgage loan is secured by the fee interest in a portfolio of 85 economy, extended-stay hotels, totalling 10,764 keys. All of the hotels in the portfolio operate under the InTown Suites flag. The brand is owned by the loan sponsor, Starwood Capital Group Global LP (Starwood), which has substantial experience in the hotel sector and maintains considerable financial wherewithal. Starwood acquired the collateral assets in 2013 when it purchased the InTown Suites platform for $770.0 million from Kimco Realty Corporation and in 2015 when it acquired the remaining 50 extended-stay properties from Mount Kellett Capital Management. Today, Starwood owns all 189 InTown Suites.

Although somewhat concentrated in the southeast region, the portfolio is geographically diverse and relatively granular, as the 85 hotel assets are located across 18 states. Texas has the highest concentration by allocated loan balance and number of hotels at 30.3% and 27, respectively. The next-largest state concentration is Florida, with eight hotels, which represents 12.7% of the total loan amount by allocated balance. Given the diverse nature of the portfolio, no single hotel represents greater than 2.1% of the allocated loan balance.

The loan sponsor, Starwood, has considerable experience in the hotel sector and has been the sole owner of the InTown Suites brand since 2015. The properties are wholly operated by sponsor affiliates, which allows for increased economic efficiencies, given the firm’s vertical integration. The properties are also not subject to brand-mandated property improvement plans.

Since acquiring the portfolio in 2013 and 2015, Starwood has invested roughly $75.5 million ($7,010 per key) of capital expenditures across the collateral portfolio; of that, Starwood spent $41.8 million ($3,883 per key) in 2015 and 2016 across 42 properties. The remaining assets have only received light updates as needed. As the full effect of the renovations at the 42 properties is realized, Starwood will determine if the remaining 43 should receive the same, partial, or none of the same upgrades. The portfolio has an average age of 20 years and many of the properties DBRS Morningstar inspected were generally dated, with some exhibiting deferred maintenance, resulting in low curb appeal.

The portfolio has a long historical background of high occupancy, with a 10-year average of 83.7% and a 10-year average revenue per available room (RevPAR) of $26.78. The weighted-average occupancy, average daily rate, and RevPAR for these properties at issuance was 80.9%, $48.53, and $39.03, respectively, compared with the trailing-12 months ended September 2018 figures of 82.2%, $50.58, and $41.42, respectively.

As of the July 2020 reporting, 42 units across seven properties were down because of fire, ceiling, or water damage posing life safety issues. Two properties had minor deferred maintenance. According to the borrower, all units were repaired and back in service as of August 2020.

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 $57.7 million and DBRS Morningstar applied a cap rate of 10.71%, which resulted in a DBRS Morningstar Value of $538.6 million, a variance of 30.1% from the appraised value of $770.0 million at issuance. The DBRS Morningstar Value implies an LTV of 87.5% compared with the LTV of 61.2% 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 the portfolio’s age and concentration in tertiary and suburban markets.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling -2.00% to account for property quality and market fundamentals as most properties are over 20 years old are located in tertiary or suburban markets.

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 is insulated from loss.

The DBRS Morningstar ratings assigned to Classes E and F had variances that were generally higher than those results implied by the LTV sizing benchmarks when MVDs are assumed under the Coronavirus Impact Analysis. These classes remain 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.

Classes X-NCP is an interest-only (IO) certificate that references 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.

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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