DBRS Morningstar Confirms Ratings on CLNY Trust 2019-IKPR

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-IKPR issued by CLNY Trust 2019-IKPR:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class G at CCC (sf)

With this review, the ratings on Classes B, C, D, E, and F have been removed from Under Review with Negative Implications, where they were placed on September 24, 2020, amid the Coronavirus Disease (COVID-19) pandemic.

DBRS Morningstar also changed the trend on Class A to Stable from Negative, and the trends on Classes B, C, and D are Stable. Classes E and F have Negative trends as a result of sustained underlying pressures and lasting residual effects of the coronavirus pandemic, and Class G has a rating that does not carry a trend. DBRS Morningstar also maintained the Interest in Arrears designation on Class G.

This transaction is secured by a portfolio of 46 extended-stay, limited-service, and full-service hotels in 16 states across the U.S. with a total of 5,948 guest rooms. The properties are conjoined by cross-defaulted and cross-collateralized mortgages, deeds of trust, indenture deeds of trust, or similar instruments applicable in each jurisdiction, plus liens on the furniture, fixtures, equipment, and leases used in the operations of the hotels.

The portfolio is diversified in terms of location and hotel type: three full-service hotels represent 6.5% of total rooms, seven select-service hotels represent 15.2% of total rooms, and 36 extended-stay hotels represent 78.3% of total rooms. No single hotel represents more than 3.8% of total rooms. The portfolio spans 16 states and the hotels operate under the Marriott, Hyatt, and Hilton brands with eight different sub-brands. Four states have properties with total allocated loan amounts (ALA) in excess of 10% of the mortgage loan balance (California: 22.1%; New Jersey: 14.5%; Washington: 11.1%; and Florida: 10.1%).

Loan proceeds were used to refinance existing debt of $830.9 million and to fund a property improvement plan reserve of $26.0 million. The loan is structured with an initial term of two years, with five one-year extension options. The sponsor invested $20.8 million of cash equity at closing. There was additional financing in the form of $45.0 million of senior mezzanine debt and $55.0 million of junior mezzanine debt, neither of which was included as part of this transaction. The servicer has indicated that the junior mezzanine debt was subsequently extinguished.

According to an article by Business Wire dated March 26, 2021, Colony Capital (Colony) sold six of its hospitality portfolios, consisting of 22,676 rooms, to Highgate and an affiliate of Cerberus Capital Management L.P., a transaction that included its interest in the collateral portfolio. The article reported that Colony’s plan is to first exit noncore assets and to ultimately exit the hospitality business to refocus on digital infrastructure assets. Additionally, other news reports noted that the loan’s other sponsor, Chatham Lodging, L.P., also sold its interest in the subject portfolio in the first quarter of 2021.

DBRS Morningstar has requested confirmation of these events from the servicer and notes that the collateral portfolio sale is a neutral to positive development for the subject transaction, particularly given Colony’s interest in leaving the hospitality industry altogether. The subject loan was in special servicing between July 2020 and August 2020 after going delinquent but was brought current through the use of reserve funds and ultimately returned to the master servicer, which has reported that the loan has been current since.

Property releases for individual hotels are permitted subject to a debt yield test and, in most cases, the payment of a release premium. For the first 20% of the loan balance, the release premium is 105% of the ALA. After reaching that point, property releases are subject to a 110% paydown for the next 15% of the initial loan balance. Thereafter, a 115% release price is required. Five specific hotels are permitted to release upon payment of the par balance, or ALA, with those releases not counting toward the aforementioned thresholds. As of the August 2021 remittance, no releases from the portfolio have been reported.

Prior to the effects of the pandemic, the portfolio reported an occupancy rate of 73.3%, which was slightly below the issuance occupancy rate of 76.7%. The net cash flow figure for the trailing 12 months ended March 31, 2020, was down 10.2% from issuance. Amid the pandemic, the YE2020 debt service coverage ratio (DSCR) dropped to 0.77 times (x), compared with the issuer’s DSCR of 1.22x. The performance declines are not surprising given the unprecedented decline in demand across multiple revenue segments for the hotel sector amid the pandemic; however, the portfolio’s underperformance prior to March 2020 does suggest that the road to stabilization could be longer compared with similar hotel portfolios backing commercial mortgage-backed securities (CMBS) loans of similar vintage.

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 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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577