DBRS Morningstar Confirms Ratings on Morgan Stanley Capital I Trust 2017-ASHF, With Negative Trends on Two Classes, and Removes UR-Neg. Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2017-ASHF issued by Morgan Stanley Capital I Trust 2017-ASHF as follows:

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

DBRS Morningstar removed the Under Review with Negative Implications designations that, given the negative impact of the Coronavirus Disease (COVID-19) pandemic on the underlying collateral, had been placed on Classes C, D, and E in September 2020. The trends for Classes A, B, and XEXT were changed to Stable from Negative. Class C has a Stable trend while Classes D and E have Negative trends. The Negative trends reflect the ongoing pandemic risk for the collateral, which may affect occupancy rates in the near term and delay the full recovery of the portfolio to pre-pandemic performance.

The rating confirmations reflect DBRS Morningstar’s view that the overall credit profile for the transaction has strengthened in the last year, particularly given the sponsor’s long-term commitment to the underlying hotel portfolio displayed in raising additional capital and funding cash shortfalls throughout the pandemic. The trust is secured by a 17-property portfolio comprising full-service, limited-service, and extended-stay hotels with 3,128 keys across seven U.S. states. The collateral was greatly affected by the coronavirus pandemic, which led to operating and debt service shortfalls since March 2020. The trust comprises 17 individual loans with a total trust balance of $419.0 million. Each loan features a two-year term with five one-year extension options and is cross-collateralized and cross-defaulted. The loans have an upcoming loan maturity in November 2021 and the borrower has until October 2021 to exercise the next extension option, which will likely occur. The loan is sponsored by Ashford Hospitality Trust, Inc., an experienced hotel investment company and publicly traded real estate investment trust. Marriott International, Inc. (Marriott) manages five of the hotels while Remington Lodging and Hospitality, LLC manages the remaining 12 hotels.

The portfolio is geographically diverse as the properties are located across seven states and 13 metropolitan statistical areas, and most assets are in primary markets. The brand affiliations are desirable as all hotels operate under the Marriott and Hilton brands, which provide extensive reservation systems and brand-loyal customers. Three hotels have franchise agreements that expire before the fully extended loan maturity and one of these has a two-year extension option available. Two of these hotels have outperformed their respective competitive sets and the franchise agreements are likely to be renewed. Hampton Inn Evansville had a franchise agreement expiration in 2021 and has been an underperformer relative to its competitive set; however, there have been no reports of its flag being changed. The portfolio’s revenue per available room (RevPAR) has historically been greater than the respective competitive set, even throughout the pandemic. Per the sponsor’s Q2 2021 earnings call, the sponsor raised a considerable amount of capital in 2021 totaling $478 million year-to-date to increase its liquid position to over $520 million to fund operating shortfalls in the near term. The sponsor is committed to the collateral while keeping loan payments current, despite the considerable cash shortfalls.

The loan was in special servicing between April 2020 and April 2021 as the borrower was delinquent for debt service payments and reserve deposits. A loan modification agreement was executed in February 2021 and the loan was returned to the master servicer in April 2021. All loan and required reserve payments were current as of the August 2021 remittance report. In consideration for the borrower bringing the loan current, the special servicer approved the second 12-month extension option and the borrower was required to purchase an interest protection policy. In addition, the special servicer modified the minimum required debt yield for the fifth extension option to 8.0%. A cash sweep reserve period commenced in April 2020 and will remain in effect until the 8.0% debt yield is achieved. Finally, no property improvement plan (PIP) reserve deposits shall be required unless any PIPs are reimposed or recommenced under a management agreement or franchise agreement. Per the borrower, there are no PIPs through YE2021. The loan modification also acknowledged the $450.0 million of loans provided to the sponsor by Oaktree Capital Management and noted an intercreditor agreement was not executed.

The loan reported a trailing 12-month (T-12) ended June 30, 2021, net cash flow (NCF) of $3.0 million, compared with a YE2020 NCF of $400,839, YE2019 NCF of $42.6 million, and YE2018 NCF of $44.4 million. The loan also reported $1.10 million in fixtures, furniture, and equipment reserves as of August 2021. STR, Inc. reports were provided for each property, which showed the portfolio beginning to rebound in performance in Q2 2021 after various pandemic-related restrictions were lifted. The occupancy rate considerably declined by 40.7% and the average daily rate dropped 14.9% across the portfolio in 2020. RevPAR has been trending upward primarily because of greater occupancy rates and the portfolio continues to outperform relative to its competitive set.

There are eight properties, representing 56.0% of the allocated loan amount (ALA), that are full-service hotels, which were considerably affected by the pandemic. The largest hotel by ALA is the Sheraton City Center Indianapolis, which reported the lowest T-12 June 2021 occupancy rate within the portfolio at 25.0%. In general, properties in Indiana had the largest occupancy rate declines with the exception of the Residence Inn Evansville, which is an extended-stay hotel. Overall, 11 properties had RevPAR penetrations greater than 100%, which is comparable to historical trends. Three properties had RevPAR penetrations less than 90%: Courtyard Crystal City Arlington (10.2% of the ALA), Embassy Suites Las Vegas Airport (7.2% of the ALA), and Hampton Inn Evansville (2.7% of the ALA).

The DBRS Morningstar ratings assigned to Classes C, D and E had a variance that was higher than those results implied by the LTV Sizing Benchmarks from the September 24, 2020 review, when market value declines were assumed under the Coronavirus Impact Analysis. The DBRS Morningstar ratings did not have any variances than those results implied by LTV Sizing Benchmarks considered with this year’s review, when a baseline valuation scenario was used. For additional information on these scenarios, please see the DBRS Morningstar press release dated September 24, 2020 in respect of the subject transaction.

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 XEXT is an interest-only (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.

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.

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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