DBRS Morningstar Changes Trend to Positive and Confirms Rating on BX Trust 2017-APPL

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)

DBRS Morningstar changed the trend to Positive from Stable.

The rating confirmation and trend change reflect the overall improved performance of the transaction, which is secured by a portfolio of hotel properties as further described below. Despite performance challenges amid the Coronavirus Disease (COVID-19) pandemic, the sponsor made no forbearance nor other relief requests, and the portfolio has recently shown signs of recovery displayed through rebounding financial reporting and healthy revenue per available room (RevPAR) penetration rates for some of the larger hotels (by allocated loan balance) as of June 2022. Collateral releases have also resulted in significant paydown to the senior classes, with the lone rated Class E now the most senior certificate in the waterfall, with significant cushion beneath of approximately $115.2 million across the Class F and Class G certificates, which DBRS Morningstar does not rate.

The subject transaction was originally collateralized by the fee-simple and/or leasehold interest in a portfolio of 51 limited-service, extended-stay, and full-service hotels totalling 6,154 keys across 17 different states in the U.S. As of the September 2022 remittance, 36 of the original 51 properties had been released from the trust, leaving 15 properties remaining in the trust with an aggregate principal balance of $172.7 million, reflecting a collateral reduction of 1.6% since DBRS Morningstar’s last review, or 78.4% since issuance. The only property released in 2022 was the Residence Inn Lakeland.

The remaining collateral includes 11 limited-service (69.0% of the trust) hotels and four extended-stay (31.0% of the trust) hotels, totalling 1,877 keys across nine states in the U.S. These hotels operate under two international brands—Marriott (51.8% of the trust) and Hilton Worldwide (48.2% of the trust)—with six 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.

The servicer-reported consolidated financial statement for the portfolio showed a net cash flow (NCF) of $19.0 million, reflecting a debt service coverage ratio (DSCR) of 2.47 times (x) for the trailing 12-month period ended March 2022; however, that figure includes revenue and expenses for properties released during that time frame. Nonetheless, cash flow has shown significant recovery when compared with the Q1 2021 DSCR of 0.29x. Financial performance of the loan is stabilizing to pre-pandemic levels on a DSCR basis, and this is partially attributable to the effects of the favourable interest rate environment on the floating-rate loan.

The five largest hotels in the portfolio, which make up 65.9% of the allocated loan balance, reported a RevPAR figure of $104 for the trailing three-month period ended June 30, 2022, compared with $61 for the same period last year, reflecting a year-over-year RevPAR growth rate of 71.9%. These five hotels reported a RevPAR penetration rate of 108.4%.

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 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. According to the September 2022 loan level reserve report, the borrower had $8.5 million held in a replacement reserve and $5.0 million held in other reserves.

At issuance, 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 fourth of which was exercised in 2022 to move the maturity date to July 2023. The loan remains on the servicer’s watchlist for low cash flow reporting; however, the loan met the required debt yield hurdle of 9.0% for its fourth extension, reporting a debt yield of 10.4% in June 2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General 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 (May 17, 2022).

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 (October 3, 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/402907.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577