DBRS Morningstar Upgrades Certain Ratings of BBCMS Trust 2018-RRI, Removes All Ratings from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) upgraded three ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-RRI issued by BBCMS Trust 2018-RRI as follows:

-- Class C at AAA (sf) from AA (low) (sf)
-- Class X-NCP at AA (high) (sf) from A (sf)
-- Class D at AA (sf) from A (low) (sf)

DBRS Morningstar also confirmed the ratings for Class E at BB (high) (sf) and Class F at B (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 loan is secured by the fee and leasehold interest in a portfolio of limited-service Red Roof Inn (RRI) properties that consisted of 86 properties totaling 10,397 keys across 25 states at issuance. Since issuance, the pool balance has been reduced by 38% from the release of 37 properties. The pool’s remaining collateral currently consists of 49 properties with an unpaid principal balance of $247 million. As a condition of the release, the borrower was required to pay a release price of 115% of the allocated loan amount and maintain a minimum debt yield of 10.7% with the remaining portfolio. The YE2019 financials across the remaining collateral reported a debt yield of 11.4% while the trailing 12-month period ended June 2020 financials reported a debt yield of 8%. The borrower will likely need to rebalance the loan in order to achieve the second maturity extension debt yield requirement of 11.5%.

The original $400.0 million mortgage debt along with $50.0 million of mezzanine debt and $9.6 million of borrower equity refinanced $445.3 million of commercial mortgage-backed security (CMBS) debt (BBCMS 2015-RRI), funded a $4.5 million in upfront reserves, and covered closing costs. The initial term of the loan is two years, inclusive of three one-year extension options. The full-term interest-only (IO) loan will have a floating rate based on one-month Libor plus a 3.125% per annum spread. The borrower exercised its first extension option extending the maturity date to February 2021.

The sponsors for the loan are Bestford Capital Pte. Ltd. (80% ownership) and Westmont Hospitality Group Westmont (Westmont; 20% ownership). RRI West Management LLC, an affiliate of Westmont, manages all the properties. Westmont, which is the owner of the RRI and the Red Roof PLUS + brands, owns a diversified portfolio of more than 500 hotels around the world, with brands including Hilton Hotels & Resorts; InterContinental Hotels Group PLC; Starwood; Fairmont Hotels & Resorts; Radisson Hotels; and Best Western International, Inc.; among others.

The properties are relatively old, having been built between 1975 and 2001, with an average age of 30 years. Since the 2015 acquisition, the sponsors injected $15.5 million of capital improvements through January 2018. The remaining collateral is generally located in tertiary markets but is also situated along busy local thoroughfares and major highways. The franchise agreement has a term of 20 years expiring in 2035, well beyond the loan’s maturity. The portfolio benefits from granularity by loan size and geography, which results in a low exposure risk to any particular market. The San Francisco International Airport property represents the largest property by net cash flow (NCF) accounting for 8.3% of the portfolio’s total NCF as of YE2019 financials.

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 $22.5 million and DBRS Morningstar applied a cap rate of 10%, which resulted in a DBRS Morningstar Value of $224.8 million, a variance of 40.7% from the appraised value of $379.1 million at issuance. The DBRS Morningstar Value implies an LTV of 109.9% compared with the LTV of 65.1% 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 concentration across a number of secondary markets and average property quality.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 1% to account for 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 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.

Classes X-NCP is an 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 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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