DBRS Morningstar Confirms Ratings on CSMC Trust 2017-CHOP, Trends Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-CHOP issued by CSMC Trust 2017-CHOP as follows:

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

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

DBRS Morningstar has also maintained Classes C, D, and E the Under Review with Negative Implications, given 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 subject transaction originally closed in June 2017, with an original trust balance of $780 million, with $79.1 million of borrower equity contributed at issuance. The collateral consists of the fee and leasehold interests in a portfolio of 48 select-service, limited-service, and extended-stay hotels, totaling 6,401 keys, located in 21 different states across the United States. The hotels operate under eight different flags across three hotel brands that include Marriott, Hilton, and Hyatt. Sponsorship is provided by a joint venture between Colony NorthStar, Inc. and Chatham Lodging Trust. The sponsor acquired the collateral assets in 2014 from Inland American Real Estate Trust as part of a larger $1.1 billion hotel portfolio, which included four additional hotel assets that are not collateral for the subject loan. Since 2009, the portfolio has received roughly $201.0 million ($31,400 per key) of capital improvements, of which approximately $109.3 million ($17,084 per key) was contributed by the sponsor following the 2014 acquisition of the portfolio.

The assets are managed by Island Hospitality Management (Island) and Marriott International, Inc. (Marriott). Island manages 34 of the hotels in the portfolio (4,370 keys; 65.5% of the total loan amount), and Marriott manages 14 hotels in the portfolio (2,031 keys; 34.5% of the total loan amount). The underlying trust loan is interest-only (IO) throughout the term, structured with a two-year initial term with three 12-month extension options. The borrower previously exercised one of three extension options available, extending the maturity date to June 2020.

The loan transferred to special servicing in April 2020 due to imminent monetary default. The borrower ceased making debt service payments effective March 2020 and submitted a relief request to the servicer as a result of the impact to hotel traffic amid the coronavirus pandemic. According to the September 2020 servicer commentary, the servicer and borrower were unable to agree on modification terms and the servicer is now pursuing the appointment of a receiver for all of the properties, to which the borrower has agreed. According to published reports released as of September 2020, the sponsor, Colony NorthStar, Inc., has agreed to sell five of its six hospitality portfolios to Highgate, a real estate investment and hospitality management company, in a transaction valued at $2.8 billion. However, the portfolio that backs the subject transaction was not part of the sale.

Prior to the coronavirus pandemic, the performance of the portfolio had been stable from origination through YE2019, when the consolidated operating statement analysis report provided by the servicer showed three properties were reporting debt service coverage ratios (DSCRs) of less than 1.0 times (x), but the weighted-average DSCR of the portfolio as a whole increased to 1.81x from 1.75x at YE2018 and has increased from the DBRS Morningstar issuance figure of 1.19x. The three properties with DSCRs of less than 1.0x at YE2019 include the Courtyard Houston Northwest, the Residence Inn Houston Westchase, and the Homewood Suites Cleveland Solon with DSCRs of 0.91x, 0.95x, and 0.98x, respectively, which represent changes from 1.78x, 0.94x, and 1.69x, respectively, at YE2018.

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 $58.3 million and DBRS Morningstar applied a cap rate of 9.5%, which resulted in a DBRS Morningstar Value of $613.3 million, a variance of 34.8% from the appraised value of $941 million at issuance. The DBRS Morningstar Value implies an LTV of 127.2% compared with the LTV of 82.9% 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 the pool’s geographic concentration across 41 markets and middle-tier hotel flags.

DBRS Morningstar made no qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating MVDs consistent with the projections in the “Global Macroeconomic Scenarios: September 10th 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 ratings assigned to Classes C, D, and E, 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. 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.

Class X-EXT is an IO certificate 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 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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