DBRS Morningstar Confirms All Ratings With Negative Trends on CSMC Trust 2017-CHOP

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-CHOP issued by CSMC Trust 2017-CHOP as follows:

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

DBRS Morningstar removed the Under Review with Negative Implications designations for Classes C, D, and E that were originally added in March 2020 as a result of the negative impact of the Coronavirus Disease (COVID-19) pandemic on the underlying collateral.

With these rating actions, all classes now carry Negative trends as a reflection of DBRS Morningstar’s continued concerns regarding the impact of coronavirus on the hotel portfolio that secures the underlying loan for this transaction. The rating confirmations are reflective of the longer-term outlook for the underlying hotel portfolio, despite the outstanding defaults and specially serviced status of the trust loan. The portfolio is diversified in location and flag, showed stable performance metrics prior to the pandemic and has garnered attention from prospective buyers in recent months, as further discussed, below.

The subject transaction closed in June 2017, with an original trust balance of $780 million, with $79.1 million of borrower equity contributed at issuance. The collateral consists of the fee and leasehold interests in a portfolio of 48 select-service, limited-service, and extended-stay hotels, totaling 6,401 keys, located in 21 different states across the United States. The hotels operate under eight different flags across three hotel brands that include Marriott, Hilton, and Hyatt. Sponsorship is provided by a joint venture between Colony NorthStar, Inc. and Chatham Lodging Trust. The sponsor acquired the collateral assets in 2014 from Inland American Real Estate Trust as part of a larger $1.1 billion hotel portfolio, which included four additional hotel assets that are not collateral for the subject loan. Since 2009, the portfolio has received roughly $201.0 million ($31,400 per key) of capital improvements, of which approximately $109.3 million ($17,084 per key) was contributed by the sponsor following the 2014 acquisition of the portfolio.

The assets are managed by Island Hospitality Management (Island) and Marriott International, Inc. (Marriott). Island manages 34 of the hotels in the portfolio (4,370 keys; 65.5% of the total loan amount), and Marriott manages 14 hotels in the portfolio (2,031 keys; 34.5% of the total loan amount). The underlying trust loan is interest-only (IO) throughout the term, structured with a two-year initial term with three 12-month extension options. The borrower previously exercised one of three extension options available, extending the maturity date to June 2020. The loan was subsequently modified in May 2020 with the loan term and IO periods increased by 12 months to September 2021.

The loan transferred to special servicing in April 2020 as a result of imminent monetary default. The borrower ceased making debt service payments effective March 2020 and submitted a relief request to the servicer as a result of the impact to hotel traffic amid the coronavirus pandemic. According to the August 2021 servicer commentary, the servicer and borrower were previously unable to agree on modification terms and receivers were subsequently appointed for 46 of the 48 properties in the collateral portfolio. The servicer reportedly received multiple unsolicited offers for the assumption of the modified debt. The servicer also reports that the borrower has entered into a into a Purchase and Sale Agreement with the sales process ongoing, as of August 2021. DBRS Morningstar reached out to the servicer and updated appraisal values are under review and pending, as of the date of this press release.

According to the year-end (YE) 2020 consolidated operating statement analysis report (OSAR), the portfolio reported a weighted-average (WA) occupancy, average daily rate, and revenue per available room (RevPAR) of 46.01%, $103.95, and $47.86, respectively. In comparison, the portfolio reported YE2019 operating figures of 76.04%, $124.73, and $95.06, respectively. In addition, as of YE2020, the debt service coverage ratio (DSCR) was reported at 0.10 times (x). Prior to the coronavirus pandemic, the performance had been stable from origination through YE2019, when the consolidated OSAR provided by the servicer showed that the WA DSCR ranged from 1.83x to 1.96x. As of the August 2021 loan level reserve report, the total reserves balance was reported at $52,906.

The DBRS Morningstar rating assigned to Classes C, D, and E had a variance that was higher than those results implied by the LTV Sizing Benchmarks from the October 16, 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 October 16, 2020, in respect of the subject transaction. DBRS Morningstar maintains Negative trends on certain classes as outlined in this press release as a reflection of our ongoing concerns with the coronavirus impact to 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 X-EXT 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 the North American CMBS Surveillance Methodology (March 21, 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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