DBRS Morningstar Takes Rating Actions on Natixis Commercial Mortgage Securities Trust 2018-RIVA

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-RIVA issued by Natixis Commercial Mortgage Securities Trust 2018-RIVA as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class V1-A at AAA (sf)
-- Class V1-B at AA (high) (sf)
-- Class V1-C at AA (low) (sf)
-- Class V1-D at A (low) (sf)
-- Class V1-E at BBB (low) (sf)
-- Class V1-F at BB (low) (sf)
-- Class V1-XF at BB (low) (sf)
-- Class V2-A at BB (low) (sf)
-- Class V2-XF at BB (low) (sf)
-- Class X-EXT at AAA (sf)
-- Class X-F at BB (low) (sf)

DBRS Morningstar maintains Negative trends on Classes V1-F, V1-XF, V2-A, V2-XF, and X-F. DBRS Morningstar changed the trends to Stable from Negative on all remaining classes. The Negative trends on the non-investment-grade rated bonds reflect DBRS Morningstar’s concerns with the portfolio, which continues to face performance challenges related to the Coronavirus Disease (COVID-19) global pandemic.

The $179.0 million floating-rate loan is secured by a portfolio of four full-service hotels with 1,265 keys across four states. The loan transferred to special servicing in April 2020 for imminent default, at which point the borrower requested a loan modification because of the negative impact of the coronavirus. The borrower subsequently withdrew the request and continues to keep the loan current, as reflected in the most recent September 2021 reporting. The loan was returned to the master servicer in June 2021 and remains on the servicer’s watchlist for monitoring given the cash flow disruption caused by the pandemic and subsequent effects on the lodging industry.

The loan is currently cash managed, reporting a debt service coverage ratio (DSCR) of 0.12 times (x) based on the senior A note debt, or 0.08x for the whole loan when including subordinate debt based on the trailing six months ended June 2021. While these figures are well below DBRS Morningstar’s expectation, they do represent a significant improvement from the trailing 12 months ended December 2020, when the senior note and whole loan DSCRs were -1.08x and -0.79x, respectively. In September 2021, $185,512 was in the lockbox reserve.

The interest-only (IO) loan had an initial term of 36 months with two one-year extension options, subject to the payment of an extension fee and a debt yield test. Because the loan did not achieve the necessary 10.75% debt yield based on the whole loan amount upon its first extension option in February 2021, the borrower was required to contribute $8.2 million of principal to rebalance the loan. The second extension option, available in 2022, will require a debt yield of 11.25%. Release of individual properties is permitted, subject to a release price that is the higher of 80% of the net sale proceeds from the property sale and 115% of the allocated loan amount for the applicable individual property (as outlined in the loan documents).

Based on the trailing three months (T-3) ended June 2021, the portfolio had a weighted average occupancy of 58.0%, average daily rate of $173, and revenue per available room (RevPAR) of $110, reflecting penetration rates of 121.9%, 84.6%, and 102.9%, respectively. While these figures are significantly below issuance levels of 70.3%, $201, and $138, respectively, the portfolio is beginning to see signs of recovery, as the T-3 ended March 2021 reflected comparable figures of 52.0%, $121, and $63, respectively. While Hilton Rosemont and Westin Alexandria continue to be the weaker performers in the group, both properties showed positive June 2021 monthly figures, with RevPAR penetration rates of 127.2% and 91.7%, respectively, above their year-to-date figures of 92.8% and 77.1%, respectively.

The sponsor used initial loan proceeds of $179.0 million, subordinate debt of $40.0 million, and sponsor equity of $115.3 million to acquire the portfolio for $329.9 million and to fund a seasonality reserve totaling $1.3 million. The lender approved the borrower’s receipt of Paycheck Protection Program funds from the U.S. Small Business Administration. As of September 2021, $4.9 million was held across six reserve, with the largest being the $2.7 million held in the seasonality reserve.

The sponsor for this loan is Junson Capital, a Hong Kong-based real estate investment company. At issuance, the sponsor and loan guarantor was Apollo Bright LLC, an affiliate of Junson Capital. According to information provided at issuance, the guarantor reported a net worth exceeding $350.0 million and liquidity of at least $18.0 million as of September 2017.

The portfolio comprises four hotels with a total of 1,265 rooms in Newport, Rhode Island; Alexandria, Virginia; Chicago; and Scottsdale, Arizona. Three of the four hotels operate under the Marriott International, Inc. (Marriott) and Hilton Worldwide Holdings Inc. brands. Marriott manages the Newport Marriott and Westin Alexandria hotels, which are not subject to franchise fees. Both of the existing Marriott management agreements for these hotels expire over the fully extended loan term. Similarly, Hilton Management LLC directly manages the Hilton Rosemont hotel under a management agreement; this agreement appears to have been renewed beyond the initial December 2020 expiration. Finally, Destination Hotels, the largest independent hospitality management company in the United States, manages the Scottsdale Resort at McCormick Ranch, the lone independent hotel in the portfolio.

The portfolio has benefitted from approximately $78.9 million in capital expenditure improvements since 2012, including $58.8 million from 2015 to issuance in 2018. The hotels, with the exception of the Hilton Rosemont, have all undergone a recent guest-room renovation. The Newport Marriott received the highest capital improvement expenditure at $47.7 million, followed by the Scottsdale Resort at McCormick Ranch at $17.0 million since 2012.

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.

Classes X-EXT and X-F are IO certificates that reference 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 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 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.

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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