DBRS Morningstar Confirms Ratings on All Classes of Atrium Hotel Portfolio Trust 2018-ATRM, Changes All Trends to Stable from Negative

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

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

In addition, DBRS Morningstar changed the trends on all classes to Stable from Negative to reflect the overall improved performance of the underlying collateral for the hotel portfolio loan that backs this transaction. The subject loan was previously in special servicing due to the borrower’s request for relief as a result of the Coronavirus Disease (COVID-19) pandemic and a loan modification was ultimately approved in late 2020. The borrower was required to contribute $10 million to the reserve accounts as part of the modification and the 18-month repayment period for deferred amounts began in September 2021. The servicer reports the loan is current, with approximately $55.0 million held across all reserve accounts, and the borrower is in compliance with the terms of the modification. Although challenges remain in regards to the hotel sector’s continued recovery from the effects of the pandemic, the provided reporting indicates steady recovery trends, with key performance indicators approaching prepandemic levels.

The transaction is backed by a portfolio of 24 hotel properties. Since DBRS Morningstar’s last surveillance action, performance has steadily improved, with the trailing 12 months (T-12) ended April 30, 2022, STR report showing a weighted average (WA) occupancy rate of 57.5%, average daily rate (ADR) of $140.39, and revenue per available room (RevPAR) of $80.72. These metrics suggest the properties are outperforming the competitive sets, which reported WA occupancy of 57.1%, ADR of $124.38, and RevPAR of $70.93; on a WA basis, the subject portfolio reported a RevPAR penetration rate of 116.5% for the period. The T-12 period ended April 30, 2022, figures compare with DBRS Morningstar’s occupancy rate of 68.2%, ADR of $134.16, and RevPAR of $91.47, assumed at issuance, and the Issuer’s figures of 70.8%, $133.94, and $94.86, respectively.

The last month of the T-12 reporting, April 2022, showed occupancy figures in line with DBRS Morningstar’s assumptions at issuance, with RevPAR for the month well above the DBRS Morningstar figure. While those figures represent a one-month snapshot, DBRS Morningstar notes they are an encouraging sign for the timeline to a return to prepandemic performance levels for the subject portfolio. The reported cash flows remain depressed, as the portfolio’s year-end (YE) 2021 net cash flow (NCF) was $34.6 million, which remains over 50% below the YE2019 figure. However, it is noteworthy that the YE2021 NCF represents a marked improvement from the YE2020 NCF of $5.1 million, and the T-12 ended March 31, 2022, NCF was $44.1 million, supporting the continued improvement trends observed by DBRS Morningstar.

The $635.0 million mortgage loan is secured by the fee and leasehold interests in a portfolio of 24 limited-service, extended-stay, and full-service hotels, totaling 5,734 keys across 12 different states in the United States. The sponsor for the loan is Atrium Holding Company (Atrium) a leading hotel owner and management firm with a portfolio of 83 hotels totaling 21,773 rooms across 29 states. An affiliate of the sponsor, Atrium Hospitality, is the property manager for all 24 of the collateral properties. The subject financing of $635.0 million and $112.4 million of equity from the sponsor retired approximately $672.2 million of existing debt and established upfront reserves. The floating-rate, interest-only (IO) loan had an initial two-year term with five one-year extension options. The loan requires that the borrower maintain an interest rate cap agreement for each extension period that, when added to the WA spread, would achieve a debt service coverage ratio of at least 1.10 times. The borrower has exercised its third extension option to June 1, 2023.

The subject portfolio of 16 full-service hotels, four extended-stay hotels, and four limited-service hotels are all cross-collateralized and cross-defaulted and operate under franchise agreements with either Hilton Hotels & Resorts or Marriott International, except for one property that operates independently. As part of the sponsor’s acquisition of the portfolio, at issuance all franchise agreements were extended beyond the fully extended loan maturity date, with expirations ranging from 2028 to 2038. Flags within the portfolio include Embassy Suites by Hilton, Courtyard by Marriott, Residence Inn by Marriott, Renaissance, Marriott, and Sheraton Hotels and Resorts. The portfolio benefits from its granularity as only one property, the Embassy Suites – Northwest Arkansas, a full-service, 400-key (7.0% of total portfolio keys) hotel in Rogers, Arkansas, represents more than 10.0% of the allocated loan amount (ALA). The largest concentration of collateral properties resides in Texas (three hotels; 948 keys; 22.3% of the ALA), with no other state having more than 20.0% of the ALA.

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.

Class X-NCP is an interest-only 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 the 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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