DBRS Morningstar Confirms All Classes of BAMLL Commercial Mortgage Securities Trust 2017-SCH

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-SCH issued by BAMLL Commercial Mortgage Securities Trust 2017-SCH as follows:

-- Class A-F at AAA (sf)
-- Class X-FEX at AAA (sf)
-- Class B-F at AA (sf)

The rating on Class B-F was removed from Under Review with Negative Implications, where it was placed on October 1, 2020. The trends on all classes are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The rating confirmations are reflective of the generally stable performance since the last DBRS Morningstar rating actions on this transaction, with no delinquencies or defaults reported by the servicer.

The transaction consists of two separate groups of certificates split between the Fee Mortgage Group and the Leasehold Mortgage Group. The Fee Mortgage Group of certificates is backed by a $140.0 million first mortgage loan secured by the borrower’s fee interest in the 2.3 acres of land occupied by the Sheraton Grand Chicago hotel, while the Leasehold Mortgage Group of certificates is backed by a $115.0 million leasehold mortgage loan secured by the leasehold interests under a ground lease on the same property. The Fee Mortgage Group of certificates (including the vertical risk retention piece) represents 100% of the beneficial interests in only the Fee Mortgage Loan. Similarly, the Leasehold Mortgage Group of certificates represents 100% of the beneficial interests in only the leasehold mortgage loan. The two loans are not cross-collateralized or cross-defaulted. DBRS Morningstar only rates three of the Fee Mortgage Group certificates (Classes A-F, X-FEX, and B-F) and does not rate any of the Leasehold Mortgage Group of certificates.

The Sheraton Grand Chicago is a 1,218-key full-service convention hotel in downtown Chicago on prime land adjacent to the Chicago River. The hotel has 125,000 square feet (sf) of dedicated meeting space comprising 43 rooms, including a 40,000-sf ballroom that holds 4,500 people. Other amenities include a fitness center, an indoor heated pool, a sun deck, a dry sauna, and a FedEx business center.

The land is leased to the owner and operator of the Sheraton Grand Chicago on a 99-year ground lease that began on January 1, 2017. Ground rent payments start at $9.0 million per year and escalate by 10.5% every five years. The initial term of the fee interest mortgage loan is three years, in which the initial maturity date was November 2020, and is structured with four one-year extension options (subject to the ground lease remaining in place). Each extension from the second to the fourth extension is subject to a 0.25% extension fee. The ground lessor and ground lessee are affiliated entities owned by the sponsor, Tishman Hotel & Realty L.P. (Tishman). Tishman originally developed the hotel and opened it in 1992. Tishman continues to maintain the hotel, with $33.9 million invested from 2012 through 2017. The capital investment included a multiphase renovation used to completely redesign and refurbish the guest rooms, meeting spaces, public areas, and amenities. At issuance, the sponsor projected an additional $29.2 million of capital improvements from 2017 through 2021.

The hotel is managed by Sheraton Operating Corporation (Sheraton), a subsidiary of Starwood Hotels & Resorts Worldwide LLC, which is in turn owned by Marriott International Inc. (Marriott). The first of two 10-year extension options to the management agreement expires December 31, 2022. Hotel ownership has limited termination rights under the agreement. Prior to issuance, two violations of noncompete clauses, one by Sheraton in 2013 and one by Marriott, resulted in settlement agreements between the borrower and property management. As a key provision of the agreement, Marriott provides a six-year net operating income guarantee of $34.5 million (including the ground rent payment) that increases by 2.0% per year and expires in 2023. The agreement also provides the leasehold owner with an option to put the leasehold interest to Marriott in 2022. Marriott also has a call option to buy the fee interest for another $200 million.

The coronavirus pandemic caused economic strain on the hotel for most of 2020. The resulting nationwide lockdown and drastic reduction in corporate and leisure travel, especially convention business, which entirely slowed down, curtailed revenues on all fronts. No recent Smith Travel Research reporting was available, as the hotel was shut down beginning in March 2020 and only recently reopened in early June 2021. At issuance, meeting and commercial demand accounted for a combined 77.4% of the demand segmentation, with leisure making up 19.8%. Despite the shutdown, payments have continued on the ground lease supporting the fee mortgage debt service. As of the July 2021 remittance, both the fee mortgage loan and the leasehold mortgage remained current. The July 2021 servicer’s watchlist commentary noted that the leasehold mortgage had been added to the watchlist in July 2021 for an outstanding servicing advance of $1.0 million dollars to pay taxes, but that the advance was less than 30 days outstanding and that the servicer expected the matter to be resolved shortly.

An analysis of the leasehold mortgage loan performance shows that, while the fee mortgage loan reported a YE2020 net cash flow (NCF) and debt service coverage ratio (DSCR) of $9.0 million (entirely attributed to ground rent payment) and 3.29 times (x), respectively, the leasehold mortgage loan reported a YE2020 NCF and DSCR of -$29.9 million and -8.06x, respectively (including the ground rent expense). Despite the YE2020 drop in NCF, based on the DBRS Morningstar value of $270.5 million determined at its last review, the trust’s cumulative rated debt of $255.0 million remains insulated from loss.

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-FEX 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 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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