DBRS Morningstar Upgrades Two Classes of Ashford Hospitality Trust 2018-KEYS

DBRS Limited (DBRS Morningstar) upgraded its ratings on two classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-KEYS issued by Ashford Hospitality Trust 2018-KEYS as follows:

-- Class F to B (low) (sf) from CCC (sf)
-- Class X-EXT to B (sf) from B (low) (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes as follows:

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

All trends are Stable.

The ratings for Classes A, B, C, D, E and X-EXT have been removed from Under Review with Negative Implications, where they were placed on October 15, 2020, reflecting concerns with the hotel market amid the Coronavirus Disease (COVID-19) pandemic. In the time since the October 2020 rating actions, there have been significant positive developments for the underlying loans, as further discussed below.

The rating upgrades and confirmations reflect DBRS Morningstar’s view that the overall credit profile for the transaction has strengthened considerably in the last year with developments that include the significant paydown of the arrears on Class F from over $500,000 at the time of the October 2020 review to a modest $11,215 as of the August 2021 remittance, a product of the agreement between the special servicer and the sponsor to make the loan current. The sponsor’s willingness to repay outstanding advances out of pocket and fund operating shortfalls that have been in place since the start of the pandemic bolster the sponsor’s long-term commitment to the underlying hotel portfolio. In addition, performance updates provided for the underlying hotel portfolio show improvements in 2021 that indicate the potential for revenues to begin to significantly improve over the lows of the pandemic within the medium term.

The subject transaction is collateralized by six loans, which are not cross-collateralized. The senior mortgage loan proceeds of $982.0 million, along with mezzanine debt of $288.2 million, refinanced existing debt of $1,067.0 million, funded $14.1 million of upfront reserves and $25.6 million in closing costs, as well as facilitated a $163.4 million cash-equity distribution. The loans are interest-only (IO) throughout the 24-month initial terms with five one-year extension options. The loans are secured by a total of 34 hotel properties across 16 states, with the largest concentration by allocated loan balance in California (34.7% of the allocated loan balance). The hotels are flagged by various brands owned by Marriott International, Hyatt Hotels Corporation, and Hilton Hotels & Resorts, with a combined total room count of 7,270 keys, consisting of 19 full-service hotels with 4,767 keys, 10 select-service hotels with 1,160 keys, and five extended-stay hotels with 893 keys.

All six loans transferred to the special servicer in June 2020 for balloon payment/maturity default, and at that time all six loans were delinquent for the April and May 2020 debt service payments. The borrower was subsequently granted a six-month forbearance period from April to October 2020, where debt-service payments and monthly reserve deposits were deferred. The servicer’s reporting confirms all deferred amounts were repaid as agreed as of June 2021 and no loans have been flagged delinquent since the forbearance was granted and the repayment period began and ended. In addition to the forbearances, all six loans were also approved to exercise the first two of five available one-year extension options. With these extensions, the loans are now scheduled to mature in June 2022. At issuance, the collateral portfolio was valued at $1.7 billion in aggregate and $1.6 billion on an individual basis. New appraisals obtained by the special servicer, dated February and March 2021, valued the collateral on an individual basis at $1.3 billion, a decline from the issuance figure but above the $1.2 billion DBRS Morningstar Value derived in 2020.

As of a July 2021 STR, Inc. report, the properties showed a trailing three-month occupancy rate ranging from 56.0% to 79.0%, while average daily rate (ADR) and revenue per available room (RevPAR) figures ranged from $109 to $192 and $66 to $154, respectively. Relative to the respective competitive sets for each collateral set, the subject properties are outperforming with regard to occupancy and RevPAR, but lag behind in ADR trends. The trailing 12 months (T-12) ended July 2021 figures in the STR, Inc. report showed ADR and RevPAR have not yet rebounded to pre-pandemic levels. However, it is also noteworthy that as of the July 2021 report, 24 of the 34 hotels in the portfolio reported T-3 and T-12 RevPAR penetration figures above 100.0%.

As of year-end (YE) 2019 the subject properties reported occupancy, ADR, and RevPAR ranges of 76% to 83%, $141 to $217, and $83 to $182, respectively. When comparing those figures to the DBRS Morningstar issuance figures of 75.0% to 78.0%, $130 to $187, and $101 to $146, respectively, the subject properties were outperforming DBRS Morningstar’s expectations prior to the onset of the pandemic.

The loan sponsor is Ashford Hospitality Trust, Inc., a well-established owner and operator of approximately 120 hotel assets across the United States. The sponsor acquired or constructed the hotels between 1998 and 2015, with most assets acquired between 2003 and 2007. The sponsor invested approximately $227.7 million ($29,256 per key) between 2013 and 2017.

The DBRS Morningstar rating assigned to Classes B, C, D, and E had a variance that was higher than those results implied by the LTV Sizing Benchmarks from the October 15, 2020, review, when market value declines were assumed under the Coronavirus Impact Analysis. The DBRS Morningstar ratings did not have any variances other 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 15, 2020, with respect to the subject transaction. DBRS Morningstar maintains Negative trends on certain classes as outlined in this press release as a reflection of its ongoing concerns with the impact of the coronavirus on 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.

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 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.

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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