DBRS Morningstar Confirms Ratings on Braemar Hotels & Resorts Trust 2018-PRME with Negative Trends, Removes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-PRME issued by Braemar Hotels & Resorts Trust 2018-PRME:

-- 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 BB (sf)
-- Class F 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. 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.

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 subject portfolio is secured by four full-service hotels, managed under two different brands and three different flags in four different cities: Seattle (361 keys; 31.0% of allocated loan amount), San Francisco (410 keys; 26.7% of allocated loan amount), Chicago (415 keys; 22.9% of allocated loan amount), and Philadelphia (499 keys; 19.4% of allocated loan amount). The $370.0 million subject mortgage loan with $65.0 million of mezzanine debt refinanced $344.3 million of existing debt, returned approximately $65.7 million of sponsor equity, and funded escrows and reserves of $20.0 million. The sponsor for this loan is Braemar Hotels & Resorts (BHR), formerly known as Ashford Hospitality Prime, which is a publicly traded real estate investment trust (REIT) that was spun off from the larger Ashford Hospitality Trust. The sponsor focuses investments in full-service luxury hotels and resorts in major gateway markets. BHR provided a business update for Q3 2020, reporting that it had 12 hotels in operation in August 2020 that reported an occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of 30.3%, $304, and $92, respectively. Per BHR’s Q2 2020 earnings update, the sponsor reported that the comparable RevPAR decreased 91.8% to approximately $19 during the quarter. As of market close on October 6, 2020, the REIT reported a market capitalization of $85.5 million.

The portfolio has a combined room count of 1,685 keys with management provided by Marriott International (Marriott) and AccorHotel Group. The portfolio operates under three flags: Courtyard by Marriott (two hotels; 46.2% of the total loan amount), Marriott (one hotel; 31.0% of the total loan amount), and Sofitel (one hotel; 22.9% of the total loan amount). Each property was renovated within the two years prior to issuance. In 2019, the two Courtyard by Marriott hotels underwent major renovations that converted them to the Autograph Collection, one of Marriott’s luxury brands. The estimated costs of the conversion were $29.6 million ($72,525 per key) for the Courtyard San Francisco Downtown and $17.2 million ($34,419 per key) for the Courtyard Philadelphia Downtown. The renovations focused on improvements to the guest rooms, meeting rooms, lobby, common areas, restaurant, meeting space, and exteriors.

The loan was transferred to the special servicer in April 2020 as the sponsor was unable to make its April 2020 debt service payment. In June 2020, the sponsor agreed to a modification that included the waiver of deposits into the furniture, fixtures, and equipment (FF&E) reserve account and any other FF&E reserve account from April 2020 to January 2021. In addition to the loan modification, the sponsor exercised its option to extend the loan to June 2021. According to the March 2020 operating statement analysis report, the portfolio reported a trailing three-month ended March 2020 occupancy, ADR, and RevPAR of 77.8%, $244, and $192, respectively. The portfolio reported YE2019 operating figures of 81.9%, $242, and $201; and YE2018 figures of 83.3%, $243, and $203. From 2018 to 2019, net cash flow (NCF) decreased 11.7%, primarily driven by a 11.8% decline in food and beverage revenue and a 3.5% increase in departmental expenses.

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 $36.7 million and DBRS Morningstar applied a cap rate of 8.68%, which resulted in a DBRS Morningstar Value of $422.7 million, a variance of 61.1% from the appraised value of $692.0 million at issuance. The DBRS Morningstar Value implies an LTV of 87.5% compared with the LTV of 53.5% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for lodging properties, reflecting the asset quality of the collateral and premier locations of the assets within top-ranked metropolitan statistical areas.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 2.75% 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 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:
On July 19, 2023, DBRS Morningstar amended this press release to correct the DBRS Morningstar NCF figure.

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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