DBRS Morningstar Upgrades Two Classes of BBCMS Trust 2018-RRI

DBRS Limited (DBRS Morningstar) upgraded its ratings on two classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-RRI issued by BBCMS Trust 2018-RRI as follows:

-- Class D to AAA (sf) from AA (sf)
-- Class X-NCP to AAA (sf) from AA (high) (sf)

In addition, DBRS Morningstar confirmed the ratings on the following classes:

-- Class E at BB (high) (sf)
-- Class F at B (sf)

DBRS Morningstar changed the trends on Classes D, X-NCP, and E to Stable from Negative. The trend on Class F remains Negative, given the challenges facing the portfolio as it attempts to rebound from the effects of the Coronavirus Disease (COVID-19) pandemic. The rating on Class C was discontinued as this class was repaid with the June 2021 remittance.

The ratings upgrades and Stable trends on the most senior classes reflect the deleveraging of the loan as a result of property releases (and their associated release premiums) since the last review. The loan is secured by a portfolio of limited-service Red Roof Inn hotel properties. At issuance, the collateral consisted of 86 properties, totalling 10,397 keys, located across 25 states. As of the June 2021 remittance, 42 properties, totalling 5,309 keys, remain in the pool, with seven properties having been released since DBRS Morningstar’s last review. As a result, the outstanding trust balance is $217.2 million, representing a collateral reduction of 45.7% since issuance. There is a mezzanine debt component of $28.6 million, which has decreased from the issuance balance of $50.0 million.

The loan documents include release provisions that stipulate a release price of 115.0% of the allocated loan amount while maintaining a minimum debt yield of 10.7% on the remaining portfolio. Although theYE2020 debt yield was reported at 5.1%, the special servicer provided a one-time waiver of the minimum debt yield requirement in consideration of the challenges the subject faced during the pandemic. However, all excess proceeds from the property releases are held in escrow by the lender until the loan is paid off. According to the servicer, the escrow currently has a balance of $2.3 million.

The loan was structured with an initial two-year term with three one-year extension options. Although the borrower had requested a payoff statement prior to the February 2021 maturity date, the loan did not pay out and the borrower continues to sell individual assets and pay down the loan balance. The loan documents required a debt yield of 11.5% in order to exercise the second extension option in February 2021, but this requirement was waived by the special servicer and the loan now matures in February 2022. The loan is structured with a cash flow sweep if the debt yield falls below 10.8% for two consecutive calendar quarters during its second extension term. Based on the June 2021 loan level reserve report, $8.8 million is held across all reserves, including $2.8 million in the Furniture, Fixture, and Equipment reserve and $5.8 million in the Other reserve, which includes the $2.3 million of excess proceeds from property releases.

The YE2020 debt service coverage ratio (DSCR) was reported at 0.88 times (x), compared with the YE2019 DSCR of 1.69x and YE2018 DSCR of 1.80x. The portfolio reported a YE2020 occupancy rate, ADR, and RevPAR of 56.6%, $56.69, and $33.57, respectively. In comparison, the issuance portfolio occupancy rate, ADR, and RevPAR were 68.6%, $66.73, and $45.78, respectively. Although the performance of the subject was affected by the pandemic, the borrower’s commitment to the portfolio in keeping the loan current without requiring pandemic-related relief while also successfully selling seven of its properties during 2020, as well as the funds currently held in reserves, are mitigating factors that offset the below breakeven performance in 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The DBRS Morningstar rating on Class E varies by three or more notches from the results implied by the LTV Sizing Benchmarks. The variance is warranted because of the uncertainty of the timing and magnitude of the hospitality industry’s recovery post pandemic.

Class 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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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