DBRS Morningstar Changes Trends on Two Classes, Confirms All Ratings on CLNY Trust 2019-IKPR

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-IKPR issued by CLNY Trust 2019-IKPR as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class G at CCC (sf)

In addition, DBRS Morningstar changed the trends on Classes E and F to Stable from Negative. All remaining classes have Stable trends with the exception of Class G, which has a rating that does not typically carry a trend for Commercial Mortgage Backed Securities (CMBS) ratings. DBRS Morningstar also maintained the Interest in Arrears designation on Class G. The rating confirmations and trend changes reflect the underlying collateral’s general improvement in performance as it continues to recover from the effects of the Coronavirus Disease (COVID-19) pandemic.

When DBRS Morningstar ratings were assigned in September 2020 and at the time of the surveillance review in September 2021, DBRS Morningstar considered a stressed scenario that estimated a value decline for the subject hotel portfolio as a result of the ongoing COVID-19 pandemic. When ratings were assigned, the subject loan was delinquent and the transfer of Colony’s interest in the subject hotel portfolio had not yet occurred, but by the 2021 surveillance review date, the defaults had been resolved, the collateral had been transferred and the loan was reporting financials that showed some improvement over the YE2020 figures. As such, DBRS Morningstar removed the Under Review With Negative Implications designation previously placed on Classes B, C, D, E, F and G in September 2021. For this review, DBRS Morningstar determined the ongoing risks as a result of the COVID-19 pandemic have materially declined. As such, the ratings rationale behind the rating confirmations and Stable trends is primarily based on the surveillance trends as further described below, as well as the results implied by the LTV Sizing Benchmarks when considering the DBRS Morningstar value of $812.1 million for the collateral hotel portfolio.

The transaction is secured by a portfolio of 46 extended-stay, limited-service, and full-service hotels in 16 states across the U.S. with a total of 5,948 guest rooms. The properties are conjoined by cross-defaulted and cross-collateralized mortgages, deeds of trust, indenture deeds of trust, or similar instruments applicable in each jurisdiction, plus liens on the furniture, fixtures, equipment, and leases used in the hotels’ operations.

The portfolio consists of three full-service hotels (6.5% of total rooms), seven select-service hotels (15.2% of total rooms), and 36 extended-stay hotels (78.3% of total rooms). No single hotel represents more than 3.8% of total rooms. The hotels operate under the Marriott, Hyatt, and Hilton brands, in addition to eight different sub-brands. Four states have properties with total allocated loan amounts in excess of 10% of the mortgage loan balance (California: 22.1%; New Jersey: 14.5%; Washington: 11.1%; and Florida: 10.1%).

In March 2021, Colony Capital (Colony), which previously served as the loan’s sponsor, closed the sale of six of its hospitality portfolios, consisting of 22,676 rooms, to Highgate and an affiliate of Cerberus Capital Management, L.P. (Cerberus), a transaction that included its interest in the collateral portfolio. The sale concluded Colony’s previously announced exit from the hospitality business. DBRS Morningstar has noted that the collateral portfolio sale was a neutral to positive development for the subject transaction, particularly given Colony’s interest in leaving the hospitality industry altogether. Highgate is an experienced owner and operator of lodging properties with a portfolio of 87,500 hotel rooms across the U.S., Europe, and Latin America. Founded in 1992, Cerberus is a leader in alternative investing with approximately $60 billion in assets across credit, private equity, and real estate platforms.

The subject loan was in special servicing between July 2020 and August 2020 after becoming delinquent. The loan was subsequently brought current through the use of reserve funds, and, according to the July 2022 remittance report, the loan remains current. In addition, no property releases have been reported. The loan was scheduled to mature in November 2022; however, the servicer has confirmed that the borrower will exercise its second extension option, pushing the maturity date to November 2023. Consolidated occupancy across the portfolio saw a 12.4% improvement between YE2020 (51.9%) and YE2021 (64.3%). Likewise, the net cash flow (NCF) of $39.2 million in 2021 was 53.7% higher than the previous year, although it was 50.7% lower than the NCF at issuance. Additionally, the NCF figure of $42.7 million for the trailing 12 months (T-12) ended March 31, 2022, indicates continued improvement in performance. According to the financial reporting for the T-12 period ended March 31, 2022, the loan had a debt service coverage ratio of 2.0 times (x), an increase from 1.8x at YE2021 and 0.6x at YE2020. Although the portfolio’s current vacancy rate suggests an increased risk for the underlying loan and corresponding certificates, DBRS Morningstar’s ratings are reflective of a stressed cash flow and a variance of -24.9% in property value from the appraised value at issuance. Furthermore, the current ratings also factor in the portfolio’s relatively high vacancy rates of 26.7% and 23.3% prior to the pandemic and at issuance, respectively.

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.

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 loan 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 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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