DBRS Morningstar Confirms Ratings on InTown Hotel Portfolio Trust 2018-STAY, Changes Trends on Two Classes to Stable from Negative

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-STAY issued by InTown Hotel Portfolio Trust 2018-STAY as follows:

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

DBRS Morningstar also changed the trends on Classes F and G to Stable from Negative. All other trends remain Stable. The trend changes on Classes F and G reflect the easing pressure from the initial phases of the Coronavirus Disease (COVID-19) pandemic and improving performance metrics when compared with YE2020 as further discussed below.

The $471.0 million mortgage loan is secured by the fee interests in a portfolio of 85 economy, extended-stay hotels, totaling 10,764 keys. All of the hotels in the portfolio operate under the InTown Suites brand. The brand is owned by the loan sponsor, Starwood Capital Group Global LP (Starwood), which has substantial experience in the hotel sector and maintains considerable financial wherewithal. Starwood acquired the InTown Suites platform in 2013 for $770.0 million and currently owns all 196 InTown Suites. Since issuance, Starwood has continued to acquire extended-stay hotel assets including the Extended Stay America brand, which included roughly 650 properties in 2021, and 111 WoodSpring Suites properties in 2022.

As of the June 2022 remittance, all 85 of the properties remain as collateral for the loan with an aggregate principal balance of $471.0 million. The loan is a three-year, floating-rate interest-only (IO) mortgage loan with two one-year extension options. The servicer has confirmed the borrower has exercised its second extension option, which extends the loan to its final maturity date in January 2023. Each of the extension options was subject to an increase of the component spread on each component of the loan, totaling 40 basis points. The borrower is required to maintain an interest rate cap agreement, with a strike price that would result in a debt service coverage ratio for the senior notes and any permitted mezzanine debt, of no less than 2.35 times. The assets are entirely operated by affiliates of the loan sponsor; therefore, they do not incur management or franchise fees. Although there is a licensing agreement in place, it does not stipulate a separate fee. Since the hotels are not subject to formal franchise agreements, there were no required property improvement plans during the loan term, but the loan includes ongoing furniture, fixtures, and equipment (FF&E) reserves that are collected at 5.0% of gross revenue on a monthly basis, which are available for planned maintenance throughout the term. The FF&E reserve balance as of June 2022 was $1.4 million.

Although somewhat concentrated in the southeastern U.S., the portfolio is geographically diverse and relatively granular—the 85 hotels are in 34 metropolitan statistical areas across 18 states. Texas has the highest concentration by number of properties and allocated loan amount (ALA), with 27 and 30.3%, respectively. Florida and Tennessee have eight and nine properties, representing 12.7% and 10.5% of the ALA, respectively. No other state accounts for more than 5.2% of the ALA. Individual properties range in size from 71 to 158 keys, with a weighted average (WA) of 128 keys. Given the diverse nature of the portfolio, no single hotel represents greater than 2.1% of the ALA, and the 15 largest loans represent only 25.8% of the ALA.

The WA occupancy, average daily rate, and revenue per available room for these properties at issuance was 80.9%, $48.53, and $39.03, respectively. The monthly investor reporting package (IRP) for June 2022 reported a WA YE2021 occupancy rate of 87.8%, compared with 82.6% at YE2020, and 84.4% at YE2019. The IRP also included YE2021 net cash flow (NCF) figures for each of the properties in the portfolio, totaling $75.3 million, representing a 7.6% increase from the issuer’s $69.5 million at issuance and DBRS Morningstar’s NCF of $57.7 million. DBRS Morningstar has previously noted the borrower did not request any Paycheck Protection Program loans or coronavirus-related relief throughout the pandemic, and although cash flow did dip slightly to $61.9 million in 2020, occupancy remained stable with a WA of more than 82% for YE2020.

In its analysis, DBRS Morningstar utilized the YE2020 NCF of $61.9 million and maintained the blended capitalization rate (cap rate) of 10.71% used during its October 14, 2020, analysis, which resulted in DBRS Morningstar value of $578.8 million, a variance of -24.8% from the appraised value of $770.0 million at issuance. The DBRS Morningstar value implies a loan-to-value ratio (LTV) of 81.4%, compared with the LTV of 61.2% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the higher end of the range of DBRS Morningstar cap rates for lodging properties, reflecting the portfolio’s age and concentration in tertiary and suburban markets.

With this analysis, DBRS Morningstar maintained the negative qualitative adjustments totaling 2% to the final LTV sizing benchmarks used during its October 14, 2020, analysis, to account for property quality and market fundamentals as most properties are more than 20 years old and are in tertiary or suburban markets.

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-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.

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.

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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