DBRS Morningstar Confirms All Classes of HMH Trust 2017-NSS, Maintains Negative Trends on All Classes

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-NSS issued by HMH Trust 2017-NSS as follows:

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

All trends are Negative. The Interest in Arrears designation on Class E has been removed, as shortfalls were recouped.

DBRS Morningstar maintained the Negative trends on all classes to reflect the continued stress the underlying collateral faces amid the Coronavirus Disease (COVID-19) pandemic and the unknowns surrounding the workout for the loan, which is in special servicing and has been delinquent for more than a year with more than $11.0 million of total outstanding advances as of the August 2021 remittance.

The loan transferred to special servicing in May 2020 as a result of imminent monetary default after the borrower stopped making debt service payments in April 2020 and requested coronavirus-related relief. While there were initial discussions of the mezzanine lender taking title through a loan assumption and modification, terms were not reached. Amid the workout negotiations, the controlling class representative exercised its right to replace the special servicer, appointing Midland Loan Services to take over for AEGON USA Realty Advisors, LLC. The borrower has since consented to a court-appointed receiver that has the authority to sell the assets through the receivership. Broker proposals have been obtained and the servicer is currently evaluating which broker to use and when to take the portfolio out to market.

At issuance, the collateral was valued at an as-is value of $356.6 million ($123,690 per key). The special servicer obtained an updated appraisal in November 2020 that estimated a cumulative as-is value of $173.2 million ($60,076 per key). A second appraisal was obtained in February 2021, with a cumulative as-is value of $295.8 million ($102,601 per key). The cumulative appraised value amount resulted in an adequate loan-to-value (LTV) ratio of 69.0% based on the mortgage balance; however, the February 2021 value is 26.1% lower than the cumulative appraised value at issuance. In addition, the LTV ratio increases to 72.7% when including the outstanding servicer advances. The February 2021 appraisal reports indicate value-add potential to the portfolio, projecting a stabilized value of $396.9 million ($137,669 per key), with stabilization periods in a two- or three-year time frame, beyond loan maturity. Per a Q2 2021 Smith Travel Research report, the portfolio had year-to-date occupancy, average daily rate, and revenue per available room figures of 56.0%, $113, and $65, respectively, reflecting penetration rates of 111.5%, 112.5%, and 128.1%, respectively.

The $204.0 million ($70,760 per key) trust loan is secured by the fee-simple interest in one hotel and leasehold interests in 21 hotels across nine different states, with the largest concentrations in California, Florida, and North Carolina. The properties have solid brand affiliation, with either Hilton Worldwide Holdings Inc., Hyatt Hotels Corporation, Marriott International, Inc., or Choice Hotel International, Inc. flags on each hotel. All franchise agreements expire subsequent to loan maturity. Nearly half the pool operates as extended-stay hotels, with the remaining operating as either limited-service or select-service hotels.

The capital stack includes a $25.0 million mezzanine loan held outside of the trust, and the trust permits an additional $26.0 million mezzanine loan; however, additional mezzanine debt has not been obtained. The mezzanine loans are co-terminous with the trust mortgage loan, which matures in July 2022. All loans, except for the Choice Comfort Inn—Fayetteville hotel, are encumbered by a ground lease. According to the servicer, the receiver has been paying ground lease payments from portfolio cash flow. The sponsor for the loan is Jay H. Shidler, founder of The Shidler Group, which was founded in 1972 and is headquartered in Honolulu.

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.

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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