DBRS Morningstar Confirms All Ratings of J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL10

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-FL10 issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2017-FL10 as follows:

-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class X-EXT at BBB (high) (sf)

DBRS Morningstar changed the trends on Classes D and X-EXT to Stable from Negative. The trend on Class E remains Negative as the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) pandemic.

At issuance, the transaction consisted of payment streams from six mortgage loans originally backed by 14 commercial real estate properties. The transaction currently has one loan remaining in the pool, The Park Hyatt Beaver Creek Resort, with a current trust balance of $45.0 million and a subordinate B note of $22.5 million. The interest-only loan had an initial maturity date in April 2019 followed by three 12-month extension options. The borrower has exercised all three of its extension options extending the loan to its final maturity date of April 2022. Funds from issuance, coupled with the borrower’s equity contribution of $83.4 million, or 57.3% of total acquisition cost, were used to fund the purchase of the collateral for $145.5 million.

The collateral is a six-story, upscale, full-service hotel in the center of Beaver Creek Village, approximately 100 miles west of the Denver central business district. The hotel originally opened in 1989 and was renovated between 2013 and 2016. The surrounding area includes various commercial outlets, restaurants, entertainment, and various other services available to guests. The hotel has 190 guest rooms with more than 20,000 square feet (sf) of meeting space spread among 15 meeting rooms, a 30,000-sf spa, and 18,000 sf of retail across eight tenants.

Loan collateral encompasses two condominium associations: Hotel A and Village Hall. The Hotel A association consists of guest rooms, a spa, a restaurant, a bar, and leased retail space. This association also includes the third-party-owned private residences on the fifth and sixth floors and the third-party-owned vacation club. The sponsor owns 77.1% of the Hotel A condominium. The Village Hall association contains most of the hotel’s function space, seasonal Powder 8 Kitchen and Tap, and banquet kitchens. The sponsor has 33.6% ownership in this association but has certain blocking rights on certain major decisions. Two companies manage the collateral; Hyatt Hotels Corporation oversees the hotel operations and East West Destination Hospitality manages the spa and retail outlets.

The loan transferred to special servicing in April 2020 as a result of coronavirus-related hardships. The loan returned to master servicing unchanged in August 2020. Given its strong dependence on leisure travel, the hotel’s performance experienced a sharp decline in 2020 as a result of the pandemic. Occupancy decreased to 41% as of year-end (YE) 2020 compared with 59% in 2019 and 63% at issuance. The YE2020 net cash flow (NCF) was down 46.7% year-over-year and down 40.0% compared with issuance. Despite its recent performance, the loan continues to produce positive cash flow as the debt service coverage ratio (DSCR) for the trailing 12-month period (T-12) ended June 2021 was 1.99 times (x) while the YE2020 DSCR was 1.78x.

According to STR, Inc. (STR) reports on file with DBRS Morningstar, the hotel lagged competitors in term of average daily rate (ADR) and revenue per available room (RevPAR) between 2019 and 2021. According to a July 2021 STR report, the hotel had penetration rates of 89.4% for ADR and 76.6% for RevPAR. The lags in performance as compared with the competitive set prior to the pandemic could suggest a longer runway for stabilization as travel picks back up to pre-pandemic levels, further supporting the Negative trend on the lowest-rated class as of this review.

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.

The DBRS Morningstar ratings for Classes D and E had variances that were generally higher than those results implied by LTV Sizing Benchmarks, which were based on a baseline valuation scenario. Given the low in-place cash flows and uncertain timeline for the collateral hotels’ stabilization, the variances were warranted.

Class X-EXT 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. In this case, Class D was considered the reference obligation tranche as it is the class that would contribute the interest to Class X-EXT.

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 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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