DBRS Morningstar Changes Trends on Six Classes, Confirms All Ratings of BBCMS Trust 2018-BXH

DBRS Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, issued by BBCMS Trust 2018-BXH as follows:

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

With this review, DBRS Morningstar changed the trends on Classes A, X-NCP, B, C, D, and E to Stable from Negative. Class F continues to carry a Negative trend. The rating confirmations and trend changes reflect DBRS Morningstar’s generally stable outlook for this transaction, given the sponsor’s continued commitment to the transaction in funding debt service shortfalls and operating expenses during the last year amid the Coronavirus Disease (COVID-19) pandemic. The Negative trend on Class F was maintained as a reflection of the potential lasting residual effects of the pandemic.

Collateral for the trust is a $257.0 million first mortgage, floating-rate loan, which is secured by the fee-simple (16) and leasehold interests (1) in a portfolio of 17 hotels comprising 2,189 guest rooms in seven states. The borrowers’ interests in each property are cross collateralized and cross defaulted. The hotels operate under franchise flags affiliated with three major brands—Marriott, Hyatt, and Hilton—with franchise agreements that extend no less than five years beyond the fully extended loan term. The trust loan proceeds were used to recapitalize the portfolio, with the sponsor retaining more than $176.0 million of equity at close. The loan benefits from strong sponsorship through BREIT Operating Partnership, an affiliate of The Blackstone Group. The loan is interest only (IO) throughout the fully extended loan term and is structured with five one-year extension options.

To date, no relief or assistance has been requested as a result of the pandemic. However, the loan was added to the servicer’s watchlist in March 2021 and, as of the August 2021 reporting, it continues to be monitored for a low debt service coverage ratio (DSCR) below the 1.0 times (x) threshold and for the upcoming maturity date in October 2021. The borrowers exercised the first available extension option in October 2020, and the servicer’s August 2021 commentary indicated that discussions have been initiated with the borrowers regarding plans for the upcoming extended maturity date. As of August 2021, there has been a principal reduction in the senior A note of $15.9 million (unchanged from last review), resulting in the remaining principal balance of $241.1 million. The August 2021 reporting showed a total reserve balance of $2.9 million.

The average property age at issuance was 12 years, and nine of the 17 properties are located within the top 25 lodging metropolitan statistical areas in the U.S., including Orlando, Atlanta, and San Jose, California. Five hotels (comprising 40.6% of the allocated loan amount (ALA)) are full service, another five (23.5% of the ALA) are select service, five more (22.0% of the ALA) are limited service, and the remaining two (13.6% of the ALA) are extended stay. The properties most recently underwent renovations totaling $13.9 million ($6,350 per key) between 2015 and 2018. The sponsor plans to invest an additional $14.4 million ($6,578 per key) in improvements through 2023. Each of the 17 properties can be released from the mortgage and loan collateral at a release price of 105% of the allocated loan balance for the first 25% of the original principal balance of the loan, and at a release price of 110% for releases thereafter. Allocated principal balances for each hotel range from $21.0 million to $96.4 million.

The portfolio properties have performed well historically. At issuance, on a consolidated basis, the portfolio was 81.7% occupied, with an average daily rate (ADR) and revenue per available room (RevPAR) of $146.14 and $119.42, respectively. Because of the pandemic, the portfolio faced significant headwinds as travel restrictions and government-mandated shutdowns were imposed. The YE2020 consolidated occupancy came in at 47.1%, with ADR and RevPAR of $110.23 and $51.20, respectively. The loan reported a YE2019 DSCR of 3.06x compared with the DBRS Morningstar DSCR derived at issuance of 3.07x. The DSCR fell to -0.1x as of YE2020 and then to -0.78x as of the trailing 12 months (T-12) ended March 31, 2021, with the latest T-12 figures showing occupancy, ADR, and RevPAR remaining similarly depressed compared with the YE2020 figures. DBRS Morningstar notes that the properties likely did not capture significant increases in demand until the later months of 2021.

The top five properties within the portfolio (by percentage of pool) continue to perform in line with, or slightly better than, their respective competitive sets. As of the reporting for the trailing three months (T-3) ended June 30, 2021, four of the top five properties had a RevPAR penetration rate above 100%. Weighted-average occupancy, ADR, and RevPAR for the top five properties were 54.9%, $127.30, and $70.81, respectively, as of the T-3 ended June 2021 reporting. At YE2019, property occupancy rates ranged from 72% to 97%, suggesting that a rebound is quite possible in the near future.

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 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 March 21, 2021 North American CMBS Surveillance Methodology, 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 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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