DBRS Morningstar Confirms Ratings on BAMLL Commercial Mortgage Securities Trust 2017-SCH

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), issued by BAMLL Commercial Mortgage Securities Trust 2017-SCH:

-- Class A-F at AAA (sf)
-- Class X-FEX at AAA (sf)
-- Class B-F at AA (sf)

Additionally, DBRS Morningstar changed the trends on all classes to Stable from Negative.

The rating confirmations and trend changes reflect the improved near-to-medium term outlook for the collateral and the projected stable performance of the transaction. The transaction consists of two separate groups of certificates split between the Fee Mortgage Group and the Leasehold Mortgage Group. The Fee Mortgage Group of certificates is backed by a $140.0 million first mortgage loan secured by the borrower’s fee interest in the 2.3 acres of land occupied by the Sheraton Grand Chicago hotel, while the Leasehold Mortgage Group of certificates is backed by a $115.0 million leasehold mortgage loan secured by the leasehold interests under a ground lease on the same property. The Fee Mortgage Group of certificates (including the vertical risk retention piece) represents 100% of the beneficial interests in only the Fee Mortgage Loan. Similarly, the Leasehold Mortgage Group of certificates represents 100% of the beneficial interests in only the leasehold mortgage loan. The two loans are not cross-collateralized or cross-defaulted. DBRS Morningstar only rates three of the Fee Mortgage Group certificates (Classes A-F, X-FEX, and B-F) and does not rate any of the Leasehold Mortgage Group of certificates.

The Sheraton Grand Chicago is a 1,218-key full-service convention hotel in downtown Chicago adjacent to the Chicago River. The hotel has 125,000 square feet (sf) of dedicated meeting space comprising 43 rooms, including a 40,000-sf ballroom that holds 4,500 people. Other amenities include a fitness center, an indoor heated pool, a sun deck, a dry sauna, and a FedEx business center.

The land is leased to the owner and operator of the Sheraton Grand Chicago on a 99-year ground lease that began on January 1, 2017. Ground rent payments began at $9.0 million per year and escalate by 10.5% every five years. The initial term of the fee interest mortgage loan was three years, having matured in November 2020. The loan is structured with four, one-year extension options (subject to the ground lease remaining in place) and the borrower has exercised two extension options to date as the loan now matures in November 2022. The second to the fourth extension options are subject to a 0.25% extension fee. The ground lessor and ground lessee are affiliated entities owned by the sponsor, Tishman Hotel & Realty L.P. (Tishman). Tishman originally developed the hotel and opened it in 1992. Tishman continues to maintain the hotel, with $33.9 million invested from 2012 through 2017. The capital investment included a multiphase renovation used to completely redesign and refurbish the guest rooms, meeting spaces, public areas, and amenities. At issuance, the sponsor projected an additional $29.2 million of capital improvements from 2017 through 2021; however, the definitive amount ultimately invested into the property over this period is unknown.

The hotel is managed by Sheraton Operating Corporation (Sheraton), a subsidiary of Starwood Hotels & Resorts Worldwide LLC, which is in turn owned by Marriott International Inc. (Marriott). The first of two 10-year extension options to the management agreement expires December 31, 2022. Hotel ownership has limited termination rights under the agreement. Prior to issuance, two violations of noncompete clauses, one by Sheraton in 2013 and one by Marriott, resulted in settlement agreements between the borrower and property management. As a key provision of the agreement, Marriott provides a six-year net operating income guarantee of $34.5 million (including the ground rent payment) that increases by 2.0% per year and expires in 2023. The agreement also provides the leasehold owner with an option to put the leasehold interest to Marriott in 2022. It does not appear that the leasehold owner has placed the leasehold interest to Marriott, as of June 2022. Marriott also has a call option to buy the fee interest for another $200 million.

According to the April 2022 Smith Travel Research report, the property reported a running 12-month ending April 30, 2022, occupancy, ADR, and RevPAR of 38.5%, $171.77, and $66.14, respectively, compared with competitive set, which reported metrics of 32.5%, $179.11, and $58.14, respectively. At issuance, meeting and commercial demand accounted for a combined 77.4% of the subject’s demand segmentation, with leisure making up 19.8%. Despite the coronavirus pandemic shutdown, payments have continued on the ground lease supporting the fee mortgage debt service. As of the June 2022 remittance, both the fee mortgage loan and the leasehold mortgage remained current and neither were on the servicer’s watchlist.

The fee mortgage loan reported a March 2022 annualized net cash flow (NCF) and debt service coverage ratio (DSCR) of $9.9 million (entirely attributed to ground rent payment) and 5.13 times (x), respectively, compared with a YE2020 NCF and DSCR of $9.0 million and 3.29x, respectively. The leasehold mortgage loan reported a YE2021 NCF and DSCR of -$16.3 million and -4.40x, respectively (including the ground rent expense), compared with a YE2020 NCF and DSCR of -$29.9 million and -8.06x, respectively. Based on the DBRS Morningstar value of $270.5 million and the trust’s cumulative debt of $255.0 million, there remains $15.5 million of implied equity. The servicer has not reported any delinquencies or defaults to date.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Class X-FEX is an interest-only (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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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 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.

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].

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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