DBRS Morningstar Confirms Ratings on the Atrium Hotel Portfolio Trust 2018-ATRM, With Negative Trends

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-ATRM issued by Atrium Hotel Portfolio Trust 2018-ATRM as follows:

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

DBRS Morningstar removed the Under Review with Negative Implications designations for Classes C, X-NCP, D, E, and F that were originally added in April 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 $635.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 24 limited-service, extended-stay, and full-service hotels, totalling 5,734 keys across 12 different states in the United States. The sponsor, Atrium Holding Company (Atrium), acquired the collateral assets as part of a 35-hotel portfolio and with other various assets out of a bankruptcy reorganization. The subject financing of $635.0 million and $112.4 million of equity from the sponsor retired approximately $672.2 million of existing debt and established upfront reserves. The floating-rate interest-only loan had an initial two-year term, with five one-year extension options. The borrower has exercised a second extension option to June 1, 2022. Atrium is a leading hotel owner and management firm with a portfolio of 75 hotels throughout the U.S. An affiliate of the sponsor, Atrium Hospitality, is the property manager for all 24 of the collateral properties.

The subject portfolio of 16 full-service hotels, four extended-stay hotels, and four limited-service hotels are all cross-collateralized and cross-defaulted and operate under franchise agreements with either Hilton Hotels & Resorts or Marriott International, except for one property that operates independently. As part of the sponsor’s acquisition of the portfolio, at issuance all franchise agreements were extended beyond the fully extended loan maturity date, with expirations ranging from 2028 to 2038. Flags within the portfolio include Embassy Suites by Hilton, Courtyard by Marriott, Residence Inn by Marriott, Renaissance, Marriott, and Sheraton Hotels and Resorts. The portfolio benefits from its granularity as only one property, the Embassy Suites – Northwest Arkansas, a full-service, 400-key (7.0% of total portfolio keys) hotel in Rogers, Arkansas, represents more than 10.0% of the allocated loan amount (ALA). The largest concentration of collateral properties resides in Texas (three hotels; 948 keys; 22.3% of the ALA), with no other state having more than 20.0% of the ALA.

According to STR, Inc. reports for each of the properties as of May 2021, the portfolio reported a trailing three-month (T-3) weighted-average occupancy, average daily rate, and revenue per available room (RevPAR) of 50.8%, $120.48, and $60.93, respectively. In comparison, the portfolio reported year-end (YE) 2019 operating figures of 68.3%, $132, and $91, respectively. Still, the performance metrics displayed for the T-3 represent an improvement over the trailing 12 months (T-12) ended May 2021 STR figures of 35.7%, $113.77, and $40.26. Despite the declines, the RevPAR penetration rates have remained slightly above 100% over the past 12 months, indicating that overall the subject properties are performing in line with their competitive sets. The servicer reported a YE2020 net cash flow (NCF) and a debt service coverage ratio (DSCR) of $5.1 million and 0.27 times (x), respectively, compared with $78.0 million and 2.68x at YE2019, and the DBRS Morningstar NCF of $72.9 million. The DSCR fell further as of the T-12 ended March 2021 to -0.48x (reflecting the first 12 full months of coronavirus), but, as of the T-12 ended June 2021, the peformance had begun to recover with a DSCR of 0.41x. As of the August 2021 loan level reserve report, the servicer reported $21.4 million in total reserves.

The loan was added to the watchlist in March 2020 as a result of the pandemic and fell delinquent in May and June 2020 before being returned to the master servicer with the execution of a standstill agreement. The borrower subsequently requested further accommodations, and a second standstill agreement was executed in October 2020. The servicer agreed to defer monthly debt service payments and reserve deposits from April to October 2020, with deferred amounts to be repaid over 18 months beginning in September 2021. A cash sweep period was activated, to remain in effect until the repayment of all payment obligations or a minimum debt yield test. As a condition of the second standstill agreement, the borrower was required to deposit $10 million into an excess cash flow reserve. As of the August 2021 servicer reporting, the loan remains on the servicer’s watchlist for a low DSCR. The servicer’s watchlist codes also suggest the loan continues to be monitored for the coronavirus relief accommodations made by the servicer.

The DBRS Morningstar rating assigned to Classes C, D, E, and F had a variance that was higher than those results implied by the LTV Sizing Benchmarks from the October 14, 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 14, 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-NCP 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 loan-level 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 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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