DBRS Morningstar Downgrades Ratings on Six Classes of BX Trust 2017-CQHP

DBRS Limited (DBRS Morningstar) downgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CQHP issued by BX Trust 2017-CQHP:

-- Class B to AA (sf) from AA (high) (sf)
-- Class C to A (low) (sf) from A (high) (sf)
-- Class X-EXT to BBB (high) (sf) from A (sf)
-- Class D to BBB (sf) from A (low) (sf)
-- Class E to BB (low) (sf) from BB (high) (sf)
-- Class F to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed the rating on the following class:

-- Class A at AAA (sf)

All trends are Negative with the exception of Class F, which does not carry a trend.

With this review, all ratings have been removed from Under Review with Negative Implications. The ratings were originally placed Under Review with Negative Implications because of concerns about the hotel market amid the Coronavirus Disease (COVID-19) pandemic and in particular the collateral hotels for the underlying loan, which are in four major U.S. cities. The rating downgrades and Negative trends reflect the continued stress for the collateral hotels and the unknowns surrounding the workout for the loan, which is in special servicing and has been delinquent for more than a year with nearly $15.0 million of total outstanding advances as of the July 2021 remittance.

At issuance, the collateral was valued at $422.5 million. The hotels, which rely heavily on commercial segmentation because of the brand’s focus on business travel and member-driven corporate demand, have been severely affected by the coronavirus pandemic. A September 2020 appraisal reported an as-is value of $312.5 million. Given the lack of progress on a resolution and the loan’s ongoing delinquency, DBRS Morningstar analyzed this loan assuming an additional decrease in value.

The loan transferred to special servicing in June 2020 as a result of imminent monetary default after the borrower ceased making debt service payments in April 2020 and requested coronavirus-related relief. The borrower’s request for a modification was declined at that time by the special servicer. Blackstone Real Estate Partners VII, L.P. (Blackstone) had reportedly attempted to transition the properties to the mezzanine lender, which was then marketing the mezzanine note for sale; however, nothing has materialized to date. The special servicer is continuing to evaluate options for a workout strategy, including pursuing foreclosure or accepting deeds in lieu of foreclosure.

The transaction is collateralized by a single loan secured by a portfolio of hospitality properties in four cities. The portfolio comprises four Club Quarters Hotels-managed boutique hotels totalling 1,228 keys across four major U.S. cities: San Francisco (346 keys; 39.4% of allocated loan amount), Chicago (429 keys; 26.4% of allocated loan amount), Boston (178 keys; 18.2% of allocated loan amount), and Philadelphia (275 keys; 16.0% of allocated loan amount). The underlying trust loan is interest only (IO) throughout the term and was structured with a two-year initial term with three 12-month extension options. The borrower exercised the first of its three extension options, extending the maturity date to November 2020. The loan is now flagged as a nonperforming matured balloon loan.

The sponsor for this loan is Blackstone, which purchased the portfolio in February 2016 from Masterworks Development Corporation, an affiliate of Club Quarters Hotels. Blackstone, one of the largest real estate private equity firms in the world with roughly $167 billion in real estate assets under management, has a current real estate owned portfolio that consists of office, retail, hotel, industrial, and residential properties, according to the company’s website.

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.

Class X-EXT 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.

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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