DBRS Morningstar Confirms Rating on BX Trust 2017-APPL, Changes Trend to Stable

DBRS Limited (DBRS Morningstar) confirmed the rating on the following class of Commercial Mortgage Pass-Through Certificates, Series 2017-APPL issued by BX Trust 2017-APPL:

-- Class E at AA (sf)

The trend has been changed to Stable from Negative.

The rating previously carried a Negative trend because DBRS Morningstar was of the view that the collateral—and the broader hospitality sector—continued to face performance challenges associated with the Coronavirus Disease (COVID-19) pandemic. However, in the last year there have been no delinquencies or defaults and, to date, the sponsor has not made a relief request related to the pandemic. Collateral releases have resulted in significant paydown to the senior classes, with the lone rated Class E now the most senior certificate in the waterfall and with significant cushion beneath of approximately $115.2 million across the Class F and Class G certificates, which DBRS Morningstar does not rate. In addition, the sponsor’s equity contributions to keep the loan current amid cash flow shortfalls is considered a positive development over the last year, as is the reporting that shows some of the larger hotels (by allocated loan balance) have healthy revenue per available room (RevPAR) penetration rates as of June 2021. These factors suggest the remaining portfolio is well positioned to recapture demand as travel continues to increase across the country. This in combination with the collateral reduction since issuance and recent shortfall funding by the sponsor support the rating confirmation and the Stable trend.

At issuance, the underlying mortgage loan contributed to this trust was secured by 51 limited-service, extended-stay, and full-service hotels totalling 6,154 keys across 17 different states in the U.S. Since that time, a significant portion of the original hotel portfolio has been released and, as of September 2021 remittance, 35 properties had been released with 16 properties remaining and an aggregate principal balance on the underlying loan of $185.3 million. This represents a collateral reduction of approximately 75.6% since issuance. The remaining 16 properties are located in these nine states: Florida, Oregon, Washington, Colorado, Tennessee, Arizona, North Carolina, South Carolina, and Alabama.

The hotels operate under two international brands—Marriott and Hilton Worldwide—with 10 different flags. The franchise agreements for the original portfolio began to expire in 2017 with some agreements lasting until 2034 but the heaviest concentration of expirations will occur in 2025 when all but two of the Hilton franchise agreements expire. The loan sponsor, BSHH LLC, an affiliate of Blackstone Real Estate Partners, acquired the portfolio along with 15 other properties not included in the transaction in May 2013 for $1.1 billion via its acquisition of Apple REIT Six, Inc. The sponsor invested $122.2 million ($3,977 per key annually) of capital expenditures across the collateral portfolio prior to issuance. At issuance, the sponsor budgeted an additional $13.7 million of renovations, including property improvement plan expenditures to six hotels over the next five years. Loan proceeds of $800.0 million ($12,997 per key) were used to refinance $734.2 million ($119,299 per key) of existing portfolio debt and return $59.0 million of equity to the sponsor.

The loan is a two-year, floating-rate, interest-only mortgage loan with five one-year extension options, the third of which was exercised in 2021 to move the maturity date to July 2022. The loan is currently on the servicer’s watchlist for low cash flow as a result of the coronavirus pandemic. Despite low revenues amid the pandemic, the sponsor has made no forbearance nor other relief request to date. The collateral reported a significant decline in cash flow from YE2019 to YE2020 as the whole loan debt service coverage ratio (DSCR) was reported at 0.52 times (x) at YE2020 and the servicer commentary notes that the net operating income DSCR as of Q1 2021 was reported at 0.44x. The loan had previously reported a YE2019 whole loan DSCR of 2.02x, however, DBRS Morningstar notes that a significant portion of the collateral has been released since that time and a full year’s reporting for the remaining 16 hotels has not been provided to date. The five largest hotels in the portfolio, which make up 60.9% of the allocated loan balance, reported RevPAR penetration rates ranging from 69.0% to 128.0% for the trailing three month period ended June 30, 2021.

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.

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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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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